The Global Macroeconomics of a Trade War: The EAGLE Model on the US-China Trade Conflict

Tinbergen Institute Discussion Paper 2019-015/VIII

28 Pages Posted: 12 Mar 2019

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Kostas Mavromatis

De Nederlandsche Bank

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 29, 2019

Abstract

We study the global macroeconomic effects of tariffs using a multiregional, general equilibrium model, EAGLE, that we extend by introducing US tariffs against Chinese imports into the US, and subsequently Chinese tariffs against US imports into China, consistent with recent trade policies by the US and the Chinese governments. We abstract from tariffs on goods exported from the euro area, focusing on a US-China trade war. A unilateral tariff from the US against China dampens US exports in line with the Lerner Symmetry theorem but global output contracts. Global output contracts even further after China retaliates. The euro area benefits from this trade war. These European trade diversion benefits are caused by cheaper imports from China and improved competitiveness in the US. As price stickiness in the export sector in each region increases, the negative effects of tariffs in the US and China are mitigated, but the positive effects in the euro area are then also dampened.

Keywords: Trade Policy, Exchange Rates, Trade Diversion, Local Currency Pricing

JEL Classification: E32, F30, H22

Suggested Citation

Bolt, Wilko and Mavromatis, Kostas and van Wijnbergen, Sweder, The Global Macroeconomics of a Trade War: The EAGLE Model on the US-China Trade Conflict (January 29, 2019). Tinbergen Institute Discussion Paper 2019-015/VIII. Available at SSRN: https://ssrn.com/abstract=3338903 or http://dx.doi.org/10.2139/ssrn.3338903

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Kostas Mavromatis

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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