CEPII, Recherche et Expertise sur l'economie mondiale
Shooting Oneself in the Foot? Trade War and Global Value Chains

Cecilia Bellora
Lionel Fontagné

 Highlights :
  • By entering into a trade war, the US administration reached its goal to weaken the Chinese economy and protect certain industries, but this comes at a cost for the US economy itself, because GVCs are ubiquitous in most of the protected sectors.
  • The increase in producer costs, caused by increased tariffs on goods for intermediate consumption, is detrimental to the competitiveness of US producers. This translates into losses of US market shares on export markets, adding to the toll of retaliation by China and other affected countries. Overall, US exports to the world post a 7.5% decrease
  • Because of the measures in place as of August 2019, in our General Equilibrium setup, three quarters of the sectors decrease their value added in the US.
  • Consistent with political economy determinants, these twists of value added are transmitted to production factors, leading to sizeable creation and destruction of jobs, and reallocation of capital to the benefit of protected sectors, mostly at the expense of their clients, i.e. downstream industries

 Abstract :
Since the beginning of 2018, the US administration has announced and implemented several measures limiting US trade, in particular with China. This has fueled retaliation and has escalated in high trade tensions at the global level. We address in this paper the effects of the current trade tensions on trade, sectoral value added and welfare, in General Equilibrium under imperfect competition. We rely on a set-up differentiating demand of goods according to their use, for final or intermediate consumption. This authorizes tracing the impact of protection, along the value chains, on prices, value added and factor income. Additional tariffs from official lists are averaged at the 6 digit level of the Harmonized System (HS6), before being aggregated at the sector level with a reference group weighted method. Negotiated quantities in Voluntary Export Restraints are also taken into account at the product level. Beyond the direct toll of sanctions, US exports to the world post a 7.5% decrease as a result of reduced competitiveness led by vertical linkages along the value chains. Because of the measures in place as of August 2019, three quarters of the sectors decrease their value added in the US, suggesting that with this tariff war the US are shooting themselves in the foot. The quantification of job destructions and creations in the different sectors is consistent with effects channeling through prices and demand along the value chains detrimental to downstream industries.

 Keywords : Trade War | Global Value Chains

 JEL : F13, F17
CEPII Working Paper
N°2019-18, December 2019

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 Fields of expertise

Trade & Globalization