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 sizeable decrease.
• Because of the tariffs in place as of February 2020, 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 :
Despite the “Phase One Deal” agreed on mid-December 2019, bilateral tariffs between US and China remain at unprecedented high levels, which will have long-lasting effects. US tariffs remain very high on parts, components and other intermediate products; similarly, only the last wave of Chinese retaliatory tariffs has been half cut. We investigate in this paper how such tensions between highly interdependent economies will impact trade, income and jobs. We rely on a set-up featuring General Equilibrium, imperfect competition and importantly 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 taken into account at the tariff line level, before being aggregated within sectors. Beyond the direct toll of sanctions, US exports to the world post a sizeable decrease as a result of reduced competitiveness led by vertical linkages along the value chains. Because of the tariffs in place as of February 2020, 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. Ultimately, this paper sheds light on the economic consequences of policies disrupting global value chains.

 Keywords : Trade War | Global Value Chains

 JEL : F13, F17