When Elephants Make Peace: The Impact of the China-U.S. Trade Agreement on Developing Countries

27 Pages Posted: 5 Mar 2020

See all articles by Caroline Freund

Caroline Freund

Peter G. Peterson Institute for International Economics

Maryla Maliszewska

World Bank

Aaditya Mattoo

World Bank - Development Research Group (DECRG)

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Date Written: March 3, 2020

Abstract

Should the China-U.S. trade agreement prompt relief because it averts a damaging trade war or concern because selective preferential access for the United States to China's markets breaks multilateral rules against discrimination? The answer depends on how China implements the agreement. Simulations from a computable general equilibrium model suggest that the United States and China would be better off under this "managed trade" agreement than if the trade war had escalated. However, compared with the policy status quo, the deal will make everyone worse off except the United States and its input-supplying neighbor, Mexico. Real incomes in the rest of world would decline by 0.16 percent and in China by 0.38 percent because of trade diversion. China can reverse those losses if, instead of granting the United States privileged entry, it opens its market for all trading partners. Global income would be 0.6 percent higher than under the managed trade scenario, and China's income would be nearly 0.5 percent higher. By creating a stronger incentive for China to open its markets to all, an exercise in bilateral mercantilism has the potential to become an instrument for multilateral liberalization.

Suggested Citation

Freund, Caroline and Maliszewska, Maryla and Mattoo, Aaditya and Ruta, Michele, When Elephants Make Peace: The Impact of the China-U.S. Trade Agreement on Developing Countries (March 3, 2020). World Bank Policy Research Working Paper No. 9173. Available at SSRN: https://ssrn.com/abstract=3548308

Caroline Freund (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
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Maryla Maliszewska

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Aaditya Mattoo

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
Room MC 3-327
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202-676-9810 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/amattoo

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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