Trade Wars: Are Good and Easy to Win?

Abstract

This paper explores the welfare implications of the current US protectionist non-cooperative trade policy and potential responses by the EU and China. Using a structural gravity approach, we evaluate three retaliatory scenarios. Our estimates suggest that the impact of this trade war on the US is negative in all policy scenarios, ranging from 0.25 to 1.4 percent of GDP, with the lower range of welfare losses when the EU or/and China do not retaliate. Therefore, it is a dominant strategy for both China and the EU to keep tariffs against US goods at current levels.

Keywords: Gravity Model, Trade War, US

JEL Classification: F13, F14