Economic-consequences-of-a-US-initiated-tariff-war

Economic Consequences of a US-Initiated Tariff War

Author and Context

  • Author: David Vanzetti, The University of Western Australia

  • Conference Paper presented at the 69th AARES Conference, Brisbane, February 2025.

  • Objective: Quantify potential trade and national income impacts due to proposed tariffs by President-Elect Trump before the 2024 elections.

  • Tariff Proposals:

    • 10% tariff on all imports.

    • 25% tariff on imports from Canada and Mexico.

    • 60% tariff on imports from China.

Methodology

  • Model Used: Global computable general equilibrium (CGE) model, specifically the GTAP version 11.

  • Assumptions:

    • Perfect competition and constant returns to scale.

    • No phasing in of reforms or underlying economic growth considered.

  • Scenarios Analyzed:

    1. US Tariffs: Implementation of proposed tariffs.

    2. Retaliation: Assuming other countries respond with equivalent tariffs.

  • Time Frame: Projections forward from a base period of 2017, aiming for insights until 2023.

Key Findings

Impacts on the United States

  • Real GDP Loss: Around 0.6% from tariffs; increases to 0.8% with retaliation.

    • Cost per household: $1,165 (tariffs only) and $1,500 (with retaliation).

  • Trade Dynamics: Significant declines in exports (approximately 18.6% under tariffs, 32.2% under retaliation).

  • Tariff Revenue: Increased revenue from tariffs (~15% of trade value), a transfer from consumers to government.

  • Price Impact: Consumer prices rise due to tariffs, impacting inflation temporarily.

Regional and Global Effects

  • Other Countries: Gains for countries (e.g., Australia, India) due to trade diversion away from China, Canada, Mexico.

  • China, Canada, Mexico: Significant negative impacts. For instance, Canada may face a GDP loss of up to 1% under retaliation.

  • Vietnam: Notable beneficiary of trade diversion from US tariffs.

Retaliation Scenarios

  • Impacts of Retaliation: Makes the US slightly worse off but creates more significant losses for other countries.

  • Credibility of Retaliation: Seen as less credible; economic incentives suggest negotiation instead.

Sector-Specific Impacts

  • US Sectors: Most negatively affected sectors include electronics, motor vehicles, and chemicals.

  • Significant Import Declines: Electronics imports from China, for example, could have a decrease of 27%, reflecting tariff impacts.

  • Australian Exports: While there are reductions in exports to China, total exports gain due to increased sales to the US and other nations.

Policy Implications and Conclusions

  • General Critique: The proposed tariffs could lead to negative consequences for the US economy and violate global trade rules, undermining the WTO.

  • Economic Rationale: Short-term tariffs might reduce the bilateral trade deficit with China but lead to longer-term losses through price increases and inefficiencies.

  • Final Thoughts: Initial tariffs may benefit some third countries, but retaliatory measures lead to mutual losses globally.