Editorial Notes

Simulation tests show US and China will suffer because of the tariff war: China Daily contributor

In their article, the writers urge both countries to discuss a win-win agreement.

Simulation tests of large general equilibrium models show that both countries' economic indicators would suffer due to the US tariff hike on US$200 billion of Chinese goods two weeks ago. PHOTO: EPA-EFE

BEIJING (CHINA DAILY/ASIA NEWS NETWORK) - By hiking the tariffs on US$200 billion (S$275 billion) of Chinese goods from 10 per cent to 25 per cent just when it seemed the China-US trade talks would achieve a breakthrough, the United States has not only intensified the trade dispute but also ensured both sides take a knock.

The US administration's "America first" policy, represented by its unilateral and protectionist moves, has harmed both countries' economic interests and proved to be a drag on the global economy, as the recent turmoil in the international capital market shows.

Simulation tests of large general equilibrium models show that both countries' economic indicators would suffer due to the US tariff hike on US$200 billion of Chinese goods two weeks ago.

For example, China's GDP could decline by 0.657 percent, manufacturing jobs by 1.028 percent, exports by 3.359 percent, and imports by 1.384 percent, while the decrease in the US' GDP would be 0.004 percent, manufacturing jobs 0.652 percent, exports 1.876 percent, and imports 3.883 percent. And global GDP, manufacturing jobs and trade could reduce by 0.123 percent, 0.28 percent and 0.79 percent.

Which means even if Beijing does not take countermeasures equal in scale to Washington's, the US economy will not be left unscathed.

The list of products subject to US tariff hike covers daily necessities, light industry and machinery, with the main targets being agricultural and food products, and general manufacturing goods produced by light industries.

In terms of agricultural and food products, China is the third-largest supplier to the US, with processed fruits and vegetables; fruit and vegetable juice; fast food and snacks; fresh vegetables and tea leaves being the main items.

Since agricultural products account for a relatively small percentage of China's total exports to the US, the tariff hike is expected to have a limited impact on its overall trade. But China's export of textiles, chemicals, daily necessities and some other products will be affected. Yet the effect of the higher tariffs would be somewhat offset due to the ratio of foreign capital and value-added goods in China's foreign trade.

In terms of product category, the tariffs are targeted at intermediate and capital goods.

Intermediate products, capital goods, and consumer goods account for 51 per cent, 32 per cent and 17 per cent of the US$250 billion of Chinese goods on which the US has imposed higher tariffs (the US had already slapped higher tariffs of US$50 billion of Chinese goods last year). And since 29 per cent of consumer goods, 39 per cent of capital goods and 74 per cent of intermediate products face higher tariffs, intermediate products will be the most affected by the US tariffs.

On the other hand, and US consumers would be forced to bear the brunt of the tariff hike, because the tariffs will raise the prices of consumer goods. Besides, the higher tariffs will deal a blow to many US industries.

The results of a quantitative simulation analysis show China's countermeasure of imposing tariffs on US$60 billion of US goods will have the intended effect, as the US' losses are set to mount. According to the simulation analysis, China's GDP, manufacturing jobs, exports and imports could reduce by 0.622 per cent, 1.046 per cent, 3.402 per cent and 1.945 per cent, while that of the US could dip by 0.067 per cent, 0.907 per cent, 2.611 per cent and 3.936 per cent.

As for global GDP, manufacturing employment and trade, they could decline by 0.134 per cent, 0.323 per cent and 0.869 per cent.

The US tariff hikes therefore will increase the economic pain of the US and world economies.

Agricultural products, chemicals and chemical products, textiles and garments are the main US items targeted by China's higher tariffs. But despite the higher tariffs providing some protection for domestic industries, Chinese consumers might have to pay more to purchase them.

In the first four months of this year, the volume of Sino-US trade dropped by 15.7 per cent to US$161.23 billion.

In terms of product structure, US exports of raw materials and foods to China saw the biggest decline, among which the export of soybeans plummeted by half in March compared with the same period last year. And US exports of plant products, minerals, jewelry and precious metals declined by more than 85 percent in the first quarter.

Since the Sino-US trade dispute is likely to continue, China should prepare for a long haul.

For instance, it should take the opportunity to further diversify its market.

What's reassuring is that in the first quarter, China's trade with Belt and Road countries grew 7.8 per cent, 4.1 percentage points more than the overall trade growth, and its ratio in total trade increased by 1.1 percentage points.

The US has not only caused damage to the Chinese and world economies, but also inflicted pain upon itself by imposing higher tariffs of Chinese goods.

More importantly, by deviating from the consensus reached by the international community and reneging on the promises it made to the world, the US has pushed the two countries from a state of balanced cooperation into a state of prisoner's dilemma.

It is time therefore that China and the US addressed each other's concerns on the basis of mutual respect and equality, and strived to reach a win-win deal as soon as possible, because that it would be conducive to the development of not only the two countries but also the whole world.

Li Chunding is a professor at the College of Economics and Management, China Agricultural University; and Dong Yan is a research fellow at the Institute of World Economics and Politics, Chinese Academy of Social Sciences. China Daily is a member of The Straits Times media partner Asia News Network, an alliance of 24 media entities.

Join ST's Telegram channel and get the latest breaking news delivered to you.