US-China trade war projected to have immense economic impact—mainly on the US

The ongoing trade conflict between the United States and China is expected to cause substantial economic damage, particularly for the U.S., while having comparatively moderate effects on China and minimal impact on Germany and the European Union. These are the findings of recent simulations conducted using the KITE model by the Kiel Institute for the World Economy (IfW Kiel).

According to the study (The consequences of the Trump trade war for Europe), the scenario analyzed assumes U.S. tariffs of 145 percent on all Chinese imports, reciprocal Chinese tariffs of 125 percent on U.S. goods, and an additional 10 percent tariff applied broadly to nearly all U.S. imports.

The model forecasts a near 50 percent decline in trade between the U.S. and China within a year, with longer-term reductions potentially exceeding 70 percent.

Higher costs for U.S. consumers

In the short term, the withdrawal from affordable intermediate and finished goods would increase U.S. consumer prices by approximately 5.5 percent. Domestic producers are expected to redirect products originally intended for export to the domestic market, likely contributing to a 17 percent drop in U.S. exports. Overall, the U.S. economy could contract by 1.6 percent as a result of the trade war.

"By isolating itself from the global market and cutting access to cost-effective suppliers, the U.S. primarily harms its own economy by forfeiting the benefits of international division of labor," said Julian Hinz, Director of Trade Policy Research at IfW Kiel.

China, while also affected, would experience a more limited impact, with exports projected to decline by 4.75 percent and GDP by 0.7 percent. Domestic prices in China could decrease by 2.7 percent, driven by increased competition from products no longer exported.

Global repercussions, limited effects on the EU

Globally, the trade dispute is expected to reduce overall economic output by 0.75 percent and push prices up by 0.7 percent. However, the economic consequences for the EU and its member states are anticipated to be minor, largely because the U.S. tariff regime applies universally rather than targeting specific regions like Europe.

Germany, given its export-oriented economy, might see exports fall by 0.2 percent and GDP by a similar margin over the course of a year. Domestic prices could drop by 0.3 percent as products originally destined for export markets are redirected to domestic buyers.

Fears of a surge in Chinese imports unfounded

Concerns that goods previously exported from China to the U.S. will flood European markets and displace local producers appear to be unfounded. Much of the affected Chinese production is expected to be absorbed by domestic demand. Moreover, sectors critical to European and German exports—such as automotive manufacturing, steel, and chemicals—face little direct competition from China, which historically accounted for less than 5 percent of U.S. imports in these areas.

By contrast, countries such as Vietnam, Cambodia, and Bangladesh, which export goods like decorations, textiles, and seasonal items, may face greater competition from redirected Chinese products.

"Trade fosters prosperity. The EU should now position itself as a reliable and open trading partner and avoid becoming entangled in a global spiral of protectionism," Hinz concluded.

Source: IWF Kiel, Photo: Fotolia