China's real GDP would only marginally decline in a trade war with the US - ADB research

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January 8, 2025 — Asian Development Bank's research estimates that higher US tariffs could halve the US trade deficit and boost nominal income. However, retaliatory tariffs would reduce US income and harm domestic production capacity and real gross domestic product (GDP), with the negative impact intensifying when tariffs extend to free trade agreement partners and prompt retaliation. Asian economies would be less affected than Canada and Mexico. For the People's Republic of China, its nominal income and trade surplus could decline, though its real GDP would only marginally decline. Retaliation by US trading partners would further harm US economic growth and slow global growth.

ADB researrch analyzes the potential economic impact of new US tariff policies, building on the protectionist measures implemented in 2018 under various sections of the US Trade Act. These earlier tariffs targeted solar cells, washing machines, steel, aluminum, and a wide range of products from China, leading to higher costs for consumers and businesses, limited employment gains, and significant economic burdens. Studies consistently showed that the costs of these tariffs were largely borne by US consumers and firms.

The analysis considers scenarios based on policy agendas from the 2024 US presidential election campaign, focusing on:

Key Findings:

Trade Balance: The US trade balance is projected to improve in all scenarios due to reduced imports. However, this improvement is influenced by both trade volumes and terms of trade. Other economies, generally running trade surpluses with the US, experience reduced exports, but some mitigate this by redirecting exports to other markets. China's trade surplus is projected to decrease significantly, but remains sizeable due to export redirection.

Nominal Income: Unilateral US tariffs initially boost US nominal income due to price increases and tariff revenue. However, with retaliatory tariffs, US nominal income declines due to contracting economic growth. China's income decreases in all scenarios, while some economies like South Korea and Canada/Mexico see initial gains under specific scenarios without retaliation, but suffer losses with retaliatory tariffs.

Real GDP: The US experiences real GDP decline in all scenarios, with larger declines when tariffs are higher or include FTA partners. Retaliatory tariffs exacerbate the GDP decline. China’s real GDP also generally decreases, although less significantly than the US. Japan and South Korea see real GDP increases in all scenarios due to trade diversion. Other Asian economies see varying impacts depending on their export competitiveness, trade diversion possibilities, and reliance on Chinese and US imports.

Global Impact: The negative impact on global GDP increases with higher tariff levels, broader scope of affected economies, and especially with retaliatory tariffs. Under the high tariff scenario with global retaliation, global real GDP is estimated to shrink by 0.37% from 2025 to 2028.

Policy Implications:

While the proposed US trade policies aim to improve the US trade balance and manufacturing employment, they are likely to harm global and US economic growth. Asian economies are expected to be less affected than Canada and Mexico, but many will still experience negative impacts. Retaliatory tariffs, while potentially preserving nominal income and production for some economies, will further damage global economic growth.

The study suggests that Asian economies should promote freer trade and investment policies to mitigate the negative impacts. Trade redirection and international factor mobility can help. Closer regional cooperation is crucial to navigate these challenges. The analysis highlights the complex and far-reaching consequences of protectionist trade policies, emphasizing the potential for significant negative impacts on both the US and the global economy.

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