Abstract:
Since the onset of the ongoing United States (US)-People's Republic of China (PRC) trade dispute in 2017, stakeholders and experts alike have expressed deep concerns that the tensions would come at a cost for the countries involved and the global economy. In this paper, we endeavor to quantify this cost by using a computable general equilibrium model based on the 2017 Asian Development Bank Multiregional Input-Output Tables. We construct three scenarios: the baseline or business-as-usual (BAU) scenario; scenario 1, based on the bilateral measures implemented as of May 2019; and scenario 2, corresponding to a full-scale tariff war where both countries impose an additional 25% tariff on all bilateral imports. We find that scenario 1 is associated with a contraction of gross domestic product (GDP) with respect to the baseline by 0.17% in the US and 0.36% in the PRC. Employment contracts by 0.24% in the US and 0.55% in the PRC. Similarly, consumption, and investment decrease by 0.14% and 0.45%, respectively in the US, and by 0.20% and 0.64% in the PRC. Scenario 2 is associated with an even larger contraction in trade flows, which leads to larger decreases in GDP, employment, consumption, and investment in both economies. We observe trade diversion to other Asian economies, with Japan, Malaysia, the Republic of Korea, and Viet Nam benefiting the most, but sectoral analysis shows that export-competing sectors to the PRC in other Asian countries stand to benefit from the ongoing trade dispute, whereas sectors that supply to the PRC stand to suffer.
