Chapter 12. Economic Sanctions and Free Trade 361
12.9 Impact of a Trade War on Global Trade
The simulation results of the CGE model show that both small trade frictions and full-scale trade wars will have negative effects on inter- national trade. A trade war will result in a decrease in bilateral trade volume and in China’s trade surplus. U.S. trade deficit will be reduced, which is consistent with the estimates of the general theory of economics.
A trade war will have different effects on processing trade and general trade.
Specifically, if China and the U.S. impose an anti-dumping duty of 193.54% on each other’s steel wheel products, China’s processing trade volume in that year will be reduced by $290 million. With resource reconfiguration, its general trade volume will increase by
18See The People’s Daily, October 29, 2011 and March 21, 2012.
19See Schedule 1 for the corresponding codes of customs commodities in the model and see Schedules 2 and 3 for sector classification and region information of the GTAP model.
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Table 12.4: Impact of trade war on both China and the U.S.
2007A 2007B 2007C Absolute Value (million USD)
China 5087 −507 −4500
The U.S. 874 382 3405
Percentage Change (%)
China 1.85 −0.18 −1.64
The U.S. 0.11 0.05 0.45
Note: “2007A”, “2007B”, and “2007C” repre- sent the three simulation schemes mentioned above, respectively, same as below.
Source: Simulation results of GEMPACK.
$5.377 billion and its trade surplus will increase by $5.087 billion, accounting for 1.85% of China’s total trade surplus.20 Most profits in processing trade belong to the multinational companies and only a small part, namely, labor cost, is earned by China. Therefore, a trade war will mainly affect the multinational companies in China.
Among them, multinational companies with the U.S. as controlling shareholder or holding most of the shares account for a large pro- portion, and they will thus bear the losses caused by the decreasing processing trade to a great extent.
If a trade war develops from a local friction to a full-scale one, it must increase its impact strength. If China and the U.S. impose 100%
tariffs on each other’s products, China’s trade surplus will decrease by $4.5 billion and surplus size will be reduced by about 1.6%.
U.S. trade deficit will decrease by 0.11%, 0.05%, and 0.45%
in the 2007A, 2007B, and 2007C simulation schemes, respectively (Table 12.4).
Some Americans expect to reverse the U.S. trade deficit through a trade war. The simulation results show that even if a full-scale trade war between China and the U.S. breaks out, the U.S. trade deficit
20The simulation is based on 2007 data.
404 From Trade Surplus to the Dispute over the Exchange Rate
Table 12.5: Degree of impact of different simulation schemes on the trade surplus/deficit of different countries (%).
2007A 2007B 2007C Australia, New Zealand −0.73 0.03 0.30
Brazil −0.60 0.02 0.15
Canada −1.13 0.04 0.31
China 1.85 −0.18 −1.64
12 EU Countries −0.25 0.01 0.13
15 EU Countries −2.45 0.13 1.18
Hong Kong −0.24 0.02 0.13
Indonesia −0.22 0.05 0.44
India −0.17 0.00 0.00
Japan −0.73 0.02 0.13
South Korea −0.38 0.03 0.30
Mexico −1.51 0.08 0.69
Malaysia −0.06 0.01 0.05
The Philippines −0.38 −0.04 −0.37
Central America −0.55 0.02 0.22
EFTA Countries −0.56 0.05 0.41
Other Countries in the World −0.21 0.01 0.07
Russia −0.17 0.01 0.09
Singapore −0.10 0.02 0.20
Other South Asian Countries −0.11 −0.09 −0.74
Thailand −0.09 0.01 0.04
Taiwan −0.07 0.01 0.11
The U.S. 0.11 0.05 0.45
Vietnam −0.06 −0.06 −0.55
Other Southeast Countries −2.85 1.11 9.49
South Africa −2.03 0.08 0.69
Source: Simulation results of GEMPACK.
may decrease by $3.4 billion. The total U.S. trade deficit was $763.23 billion in 2007. Therefore, it can only decrease by 1.6% through a full-blown trade war, which is too little to solve the problem. Sim- ulation results show that the trade imbalance between China and the U.S. comes from a deep structural reason. Even if a full-scale trade war breaks out, China’s huge trade surplus will not be reduced significantly and neither will the U.S. trade deficit be improved sig- nificantly. The people advocating a trade war will be disappointed (Table 12.5).
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If a trade war breaks out between China and the U.S., after imposing punitive tariffs, the prices of the goods made in China will increase sharply. As a result, U.S. consumers will inevitably reduce their demand for these goods. The trade between China and the U.S.
is not competitive but complementary. In other words, most products imported by the U.S. from China are not produced in the U.S., not because it has no technology or capital to produce these products but because the wage level in the U.S. is so high that enterprises will suffer losses as long as they produce labor-intensive products.
Therefore, they have to import the corresponding alternatives from other countries because they cannot fill the gap.
Southeast Asian countries share a similar export structure with China. When a trade war breaks out between China and the U.S., the latter will import alternatives from other countries at a higher price.
The simulation results show that if China and the U.S. increase tar- iffs by 10% and 100% on each other, the current surplus of Southeast Asian countries will significantly increase by 1.1% and 9.45%, respec- tively. At the same time, Mexico, as the largest exporter of processing trade second only to China, shares similar structural characteristics with China in exports and is also the third largest trade partner of the U.S. and a member of the North American Free Trade Agreement (NAFTA). Therefore, a considerable part of U.S. orders flows from China to Mexico.
After China and the U.S. impose a punitive tariff of 193.54% on each other’s steel wheel products, the total exports and imports of both sides decrease. China’s import decreases more than its export.
As a result, its trade surplus increases. The U.S. trade surplus sim- ilarly increases. Almost all trade surpluses of other countries in the trade war decrease to various extents. In particular, the trade sur- pluses of EU 15 countries and Southeast Asian countries decrease substantially.
With the global economic integration and the acceleration of technological progress, the auto industry has formed a world- wide industrial chain including research, development, procurement, production, and sales. Steel wheel is one part of the automo- bile production chain. Today, the structure of the international
406 From Trade Surplus to the Dispute over the Exchange Rate
1.85
0.11
−4.00
−3.00
−2.00
−1.00 0.00 1.00 2.00 3.00
Australia, New Zealand Brazil Canada China 12 EU Countries 15 EU Countries Hong Kong Indonesia India Japan South Korea Mexico Malaysia The Philippines Central America EFTA Countries Other Countries in the World Russia Singapore Other South Asian Countries Thailand Taiwan United States Vietnam Other Southeast Countries South Africa
Figure 12.1: China and the U.S. impose 196.54% punitive tariffs on each other’s steel wheel and relevant products.
automobile parts industry is a pyramid, on which the top is the system supplier, the body is the module supplier, and the base is the parts supplier. The corresponding profits are also allocated from highest to lowest, and China’s automobile parts industry is at the bottom overall. The steel wheel war between China and the U.S.
directly affects the parts supplier at the bottom, thus creating a linkage effect on the international production chain.
If a full-scale trade war between China and the U.S. breaks out, and if both countries impose 10% more tariffs on all goods based on the existing ones, China’s trade surplus will decrease by 0.18%
and the U.S. trade surplus will increase by 0.05%. If they impose the punitive tariff of 100%, China’s trade surplus will decrease by 1.64%
and the U.S. trade surplus will increase by 0.45%.
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Table 12.6: Impact of a steel wheel trade war between China and the U.S.
(2007A) on the total exports and imports of different countries and on China’s trade (%).
Change of total exports
Change of total imports
Change of total exports to China
Change of total imports from China Australia, New Zealand −0.05 0.02 −0.54 0.08
Brazil −0.09 0.08 −0.54 0.07
Canada 0.09 0.18 −0.73 0.30
12 EU Countries −0.03 0.02 −0.51 1.30
15 EU Countries −0.06 0.07 −0.51 0.62
Hong Kong −0.03 −0.01 −0.58 0.37
Indonesia −0.04 0.00 −0.49 0.23
India −0.06 0.02 −0.50 −0.01
Japan −0.08 0.06 −0.51 0.63
South Korea −0.04 −0.01 −0.53 0.45
Mexico −0.13 0.08 −0.45 0.87
Malaysia −0.02 −0.02 −0.58 0.31
The Philippines 0.00 0.02 −0.46 0.25
Central America −0.04 0.02 −0.69 0.18
EFTA Countries −0.03 0.00 −0.51 0.28
Other Countries in the World −0.04 0.01 −0.50 0.24
Russia −0.03 −0.01 −0.44 0.16
Singapore −0.01 0.00 −0.59 0.32
Other South Asian Countries −0.06 0.00 −0.48 0.20
Thailand −0.02 −0.01 −0.57 0.36
Taiwan −0.03 −0.03 −0.60 0.42
Vietnam −0.03 −0.03 −0.47 0.30
Other Southeast Countries −0.04 −0.03 −0.49 0.10
South Africa −0.04 0.01 −0.51 0.05
Source: Simulation results of GEMPACK.
A trade war between China and the U.S. has both positive and negative effects on Southeast Asian countries. The trade surpluses of Thailand, Singapore, Malaysia, and Indonesia increase and those of Burma, Cambodia, Laos, and Brunei increase significantly. With the small trade scale of these countries, a slight increase in the export surplus can lead to a high growth rate. At the same time, the trade surpluses of the Philippines and Vietnam will decrease. These two
408 From Trade Surplus to the Dispute over the Exchange Rate
countries mainly process the supply materials and import a number of processing products from China. In recent years, the bilateral trade between Vietnam and China has significantly increased. In 1998, goods imported from China by Vietnam accounted for only 1.9%
of Vietnam’s total import. This figure rose to 23.8% in 2010. The impact of the trade war between China and the U.S. on the Chinese market will indirectly impact the foreign trade of these countries through the division chain of labor of intra-product (Table 12.6).
The orders of China’s labor-intensive industries will be transferred to Southeast Asian countries partially, because in the 1990s, labor- intensive products were transferred massively from South Korea, Tai- wan, Hong Kong, and Singapore to China, forming a production chain: Importing a large number of intermediate inputs from Tai- wan and South Korea, assembling and processing them, and finally exporting the final consumer goods to the U.S., the EU and other industrial countries. After 2005, China’s trade surplus increased sig- nificantly, and thus the global production structure became espe- cially prominent. As China’s coastal economy was gradually entering the period of industry transition, the costs of various resources such as land continued to rise, along with labor cost. As a result, some processing industries moved from coastal areas to the inland, South- east Asia, and South Asia. If the U.S. imposed 100% import tariff on Chinese products, some orders would move from China to other developing populous countries in Southeast Asia. However, under the control of production ability and investment scale of these coun- tries, the textile trade surplus of other Southeast Asian countries only increased by $279 million21, and China’s orders did not move significantly, accounting for only about 0.102% of its total surplus in that year. Aside from the impact on total surplus and the deficit of different countries, a trade war between China and the U.S. has different effects on different industries.
According to the table, if China and the U.S. impose punitive import tariffs on all products of the other side, either 10% or 100%,
21Textile here refers to “tex,” “wap,” and “lea.”
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−0.18
0.05
−0.40
−0.20 0.00 0.20 0.40 0.60 0.80 1.00 1.20
Australia, New Zealand Brazil Canada China 12 EU Countries 15 EU Countries Hong Kong Indonesia India Japan South Korea Mexico Malaysia The Philippines Central America EFTA Countries Other Countries in the World Russia Singapore Other South Asian Countries Thailand Taiwan United States Vietnam Other Southeast Countries South Africa
Figure 12.2: Early stages of the trade war between China and the U.S. (10%
punitive tariffs).
the textile and wood manufacturing industries in China and agri- cultural products in the U.S. will be most affected. The impact on the U.S. agricultural products will be greater than that on China’s textile products. Therefore, a trade war between China and the U.S. will damage the economies of both countries to a large extent (Table 12.7).
China is the largest developing country, and the U.S. is the largest developed country in the world. They are the two largest trade bodies aside from the EU. Therefore, the changes in their production and consumption will directly affect world trade.
In summary, if a trade war breaks out between China and the U.S., the total exports and imports of both countries will reduce to various extents. Exports from China’s processing trade to the world will decrease significantly, and U.S. import demand will decrease more significantly than its export. On one hand, the impact on China and the U.S. will reduce world product supplies and increase the relative prices of traded goods. On the other hand, reductions of the final
410 From Trade Surplus to the Dispute over the Exchange Rate
−1.64
0.45
−4.00
−2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00
Australia, New Zealand Brazil Canada China 12 EU Countries 15 EU Countries Hong Kong Indonesia India Japan South Korea Mexico Malaysia The Philippines Central America EFTA Countries Other Countries in the World Russia Singapore Other South Asian Countries Thailand Taiwan United States Vietnam Other Southeast Countries South Africa
Figure 12.3: Full-scale trade war between China and the U.S. (100% punitive tariffs).
Source: Figures 12.1–12.3 are from the simulation results of GEMPACK, and the original data are from GTAP Version 8.
U.S. consumption demand and China’s intermediate input demand will directly affect world production and world economic recovery after the crisis (Table 12.8).