We use an advanced model of the global economy to consider a set of scenarios consistent with the proposal to impose a minimum 60% tariff against Chinese imports and blanket minimum 10% tariff against all other US imports. The model’s structure, which includes imperfect competition in increasing-returns industries, is documented in Balistreri, Böhringer, and Rutherford (2024). The basis for the tariff rates is a proposal from former President Donald Trump. We consider these scenarios with and without symmetric retaliation by our trade partners. Our central finding is that a global trade war between the United States and the rest of the world at these tariff rates would cost the US economy over $910 billion at a global efficiency loss of $360 billion. Thus, on net, US trade partners gain $550 billion. Canada is the only other country that loses from a US go-it-alone trade war because of its exceptionally close trade relationship with the United States.

We provide context in terms of the current trade conflict, primarily between the United States and China, and enumerate a set of scenarios based on the proposed blanket tariffs. Results suggest the United States is the biggest loser in a comprehensive trade war with the rest of the world. We also consider a potential transatlantic alliance, where Europe joins the United States in tariffs against China. Transatlantic cooperation reduces US losses and leads to sharp losses for China, highlighting the benefits of cooperation relative to the proposed go-it-alone strategy.

State of Play

The 2018 US-China trade war was a major economic conflict initiated by the United States that targeted alleged unfair trade practices by China, such as intellectual property theft, forced technology transfers, industrial subsidies, and currency manipulation. The conflict escalated through rounds of tariff impositions, retaliatory measures, and negotiations, significantly affecting global markets and supply chains.

The United States imposed tariffs on over $250 billion worth of Chinese goods, targeting industries like technology, machinery, and consumer products. China responded with tariffs on about $110 billion of US goods, affecting agriculture, automobiles, and other sectors.

Multiple rounds of negotiations occurred between 2018 and 2019. The two countries reached a temporary truce with the “Phase One” trade deal in January 2020, where China agreed to purchase more US goods, particularly agricultural products, and address some intellectual property concerns. China did not, however, meet any of the additional purchase commitments. China made some progress toward greater intellectual property protection in certain areas yet continues to tolerate flagrant intellectual property theft in others. Both economies have suffered from reduced market access and higher costs for businesses and consumers. The conflict also disrupted global supply chains, particularly in consumer technology products, and hit US farmers hard due to China’s retaliatory tariffs.

Also, in 2018 the United States imposed a 25% tariff on steel and a 10% tariff on aluminum imports, affecting a wide range of countries, including EU members, South Korea, and Japan. The US administration justified the tariffs on the grounds that a robust domestic steel and aluminum industry was necessary to ensure the availability of critical materials for defense and infrastructure projects despite a memorandum from the Secretary of Defense stating that the “[Department of Defense (DoD)] does not believe that [steel and aluminum imports] impact the ability of DoD programs to acquire the steel and aluminum necessary to meet national defense requirements”.

The steel and aluminum tariffs sparked significant backlash, leading to retaliatory tariffs by several countries. Eventually, the United States negotiated managed trade deals with some countries, such as Canada, Mexico, and the EU. Australia escaped relatively unscathed, but other 3 countries were forced to negotiate exemptions or quota systems, such as South Korea, Brazil, and Argentina.

The tariffs increased costs for US manufacturers that rely on imported steel and aluminum, leading to higher prices for US manufacturers, and consumer goods like cars and appliances. US steel and aluminum producers saw benefits in terms of higher domestic prices. The overall effect on jobs was mixed, with some gains in the metal industries but larger losses in sectors reliant on metal imports and in the sectors that were targets of retaliation, namely US agriculture.

In sum, the 2018 trade war generated losses for China and the US economy. The Biden-Harris administration kept the punitive tariffs on China and the steel and aluminum (national-security) tariffs in place, which remains a point of contention in US trade policy.

Recent proposals

In 2024, during his campaign for a second term, former President Donald Trump proposed imposing a 60% tariff against imports from China and a 10% tariff against imports from everyone else in an apparent effort to increase the number of manufacturing jobs in the United States and boost domestic industries. Most economists would agree that tariffs at this scale will backfire by undermining US economic performance.

Results

The results show both the United States and China suffer losses from the 2018 tariffs, with US losses equivalent to $81.3 billion and $63.3 billion for China. Imposing a 60% tariff on China and 10% tariff on everyone else unequivocally leads to additional losses for the United States. As a technical note, the economic model evaluates policies based on changes in household welfare, so we can interpret the $81.3 billion loss for the United States as the dollar value of the extra consumption that private households could have had in the absence of the tariffs.

United States

Specifically, with a 60% tariff on China, US losses grow to $560.7 billion; and, if China retaliates, US losses are $665.4 billion. If the United States were to impose the 60% tariff on China and a 10% tariff on everyone else, US losses are $511.0 billion; and, if everyone retaliates in kind, US losses grow to a shocking $911.8 billion.

China

China suffers across almost all scenarios, and China’s losses are greatest when the United States and EU cooperate. Specifically, if the United States were to impose the 60% tariff on China, China’s estimated losses are equivalent to $70.6 billion. But if China retaliates, their losses reduce to $50 billion because the retaliation shifts the terms-of-trade in their favor. As with any large country, tariffs increase export prices relative to (net-of-tariff) import prices. If the United States were to impose the 10% tariff on other countries, China’s losses shrink to $26.2 billion, reflecting a further improvement in the terms of trade as European and other goods become relatively less expensive due to less US demand. When everyone retaliates against the United States, the closest scenario here to a US-led go-it-alone global trade war, China actually gains $38.2 billion. As discussed in the introduction, a global trade war between the United States and the rest of the world creates significant opportunities for China in terms of new export opportunities in Europe and less expensive non-US imports. China suffers the most when the United States and EU cooperate. Specifically, welfare losses for China are between $26.2 billion and $70.6 billion when the US pursues a go-it-alone strategy. When the United States and EU cooperate, China’s welfare losses reach $261.3 billion to $464.1 billion.

European Union

The EU economy gains from the US-led trade wars mostly because of trade diversion. That is, with the United States and China imposing tariffs on each other, the EU has greater access to lower priced imports from China, and effectively gets preferential treatment for its goods in both the US and Chinese markets. The EU benefits the most ($234.6 billion) when they let the United States go it alone, under the “ALL6010” scenario. In that scenario, the United States imposes tariffs against China and all other countries, and everyone retaliates in kind against the United States, which is the closest scenario to a US-led global trade war. EU importers benefit from lower prices and EU exporters benefit from greater preferential market access.

Other countries

Other countries such as Canada, Mexico, South Korea, and the rest of the world mostly experience net gains from a US-China trade war. Canada and Mexico, however, experience losses when the United States imposes 10% tariffs on all other countries and they retaliate in kind, reflecting the tightly knitted supply chains across North America.

Specifically, Canada and Mexico experience a loss when the United States imposes tariffs on China and all other countries. When other countries retaliate, Mexico goes back to a net gain while Canada continues at a loss. This is attributed to the fact that, although both Mexico and Canada have strong ties to US markets, Canada’s trade with the United States is biased toward increasing-returns-to-scale sectors. In this regard, shrinking trade between the United States and Canada implies a greater cost for Canada. South Korea and other OECD countries gain from the US-China trade war scenarios—South Korea’s net gains reach $48.9 billion

US-EU Cooperation

Transatlantic cooperation on tariffs against China, as a punitive measure for intellectual-property violations and other unfair-trade practices, are more effective in terms of greater losses for China and easing the burden on the United States. Specifically, if the United States and EU were to cooperate and impose tariffs against China simultaneously, with the United States imposing 60% tariffs and the EU imposing a minimum of 25% tariffs, US losses reduce to $435.6 billion and China’s losses increase to $261.3 billion. If China retaliates against the United States and EU in kind, US losses remain mostly the same, but China’s losses increase to $464.1 billion.

EU cooperation, however, comes at a cost for the EU’s economy. The EU goes from a $234.6 billion gain (in “ALL6010”) to a $77.8–$103.8 billion gain in the cooperation scenarios.

These results highlight three important nuances of US-EU cooperation: (a) securing EU cooperation eases US economic losses from the trade wars; (b) US-EU cooperation sharply increases the net losses to the Chinese economy; and, (c) cooperating with the United States comes at a cost for the EU and reduces their net gains from the trade wars.

Conclusion

In conclusion, the analysis presented here reveals that escalating US tariffs, particularly the proposed 60% tariff against China and 10% tariff against all other trade partners, would impose substantial economic costs on the United States. We show that while China and other US trade partners may experience some losses, the United States would bear most of the global efficiency cost, with potential economic losses surpassing $910 billion if all countries retaliate. Interestingly, many of the US’s trading partners, including the EU, South Korea, and other OECD countries, stand to benefit from trade diversion as US goods become less competitive globally

The findings further underscore that transatlantic cooperation in imposing tariffs against China would mitigate some of the US’s losses while amplifying the economic pain for China. This cooperation comes at a cost, however, for the EU in terms of the forgone benefits of letting the United States go it alone. Overall, the results highlight the complexities and far-reaching consequences of a “fortress America” protectionist trade policy, where, in the context of a global trade war, the United States stands to lose the most, both in terms of economic welfare and global competitiveness.

To read the article as it was published on the Yeutter Institute webpage, click here.

To read the full article, click here.

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As the U.S. government advances its goals at home using a range of domestic economic tools, trade policy provides an avenue to expand decarbonization efforts globally. John Podesta, President Biden’s climate envoy, spoke at Columbia University earlier this year and acknowledged the fundamental nexus between trade and the environment, calling for the creation of a task force to look at how trade policies can contribute to solving urgent climate challenges. “The stakes couldn’t be higher,” Podesta said. “But I believe if we make the right choices, we can create and maintain millions of good-paying jobs in the clean energy economy of the future. We can mobilize billions in private investment in countries around the world. We can accelerate technological innovation and position nations to overcome the challenges of today and tomorrow. And we can do it while protecting our planet for ourselves and our children.”

Since 2020, the World Trade Organization (WTO) has also taken a more expansive view on the range of topics where trade could help address climate and environmental challenges. On July 4th, WTO Deputy Director General Paugam stated, ”…(W)e are at a crossroads in the multilateral system, with an opportunity to shape a global win-win approach for trade and the environment. We can combine green transition, green industrialization and trade cooperation. This is what “reglobalization” is about. And the time to act is now.”

The U.S.’s most ambitious environmental trade commitments are in the U.S.-Mexico Canada Agreement (USMCA), which allows countries to continue with domestic climate initiatives while encouraging cooperation on environmental goals and calling for a level playing field in these efforts. The work is ongoing, but separate and siloed from the other aspects of USMCA. Moving forward, there is an opportunity to incorporate climate as a core consideration in all aspects of future agreements, adding an additional priority to the existing goals of reducing barriers to U.S. exports, protecting U.S. interests competing abroad, and enhancing the rule of law.

Imagine if U.S. trade negotiators asked “Will this help (or hurt) climate change” for each issue in their negotiation and then used all aspects of trade, supply chain or economic security agreements to create positive (or negative) incentives to accelerate climatemitigation efforts. Topics such as subsidy rules, market access (tariffs), and non-tariff barriers could be recast to tackle climate concerns in new and more aggressive – and possibly more effective – ways. New mechanisms like carbon border taxes and other “domestic” policies with international implications could also be used to accelerate efforts to both reduce carbon and ensure a level playing field for countries with stringent rules. But such a focus may need to be balanced with other politically important priorities, such as development, economic growth, and employment.

Penelope Naas is the Lead, Allied Competitiveness Initiative, German Marshal Fund, and an Advisor to the Trade Experettes

Trade+&+Climate+Paper+

To read the full paper as published by the American Leadership Initiative, click here.

To read the full paper, click here.

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Unlike President Trump’s across-the-board import tax increases on Chinese goods in 2018 and 2019, the tariff increases announced on 14 May 2024 by the Biden Administration will affect just 14 product categories. The Biden Administration prefers selective decoupling from China, which is restricted to a limited number of sensitive sectors. Just $18bn of Chinese imports are expected to be affected, less than 5% of total Chinese annual imports to the United States.

This isn’t another Trump-style tariff war

The very fact that President Biden felt he had to take this high-profile measure is a testament to three factors:

• The tightness of November’s US presidential election.
• Biden’s desire to shore up his base vote in key swing states comprised mainly of trade union members working in traditional manufacturing sectors, and their families.
• How few friends China has in Washington, D.C.

In terms of corporate impact, there are two drivers: timing and the scale of current sourcing from China.

Some goods shipped from China — including aluminum, cranes, electric vehicles, face masks, lithium-ion batteries, and steel — will face higher import tariffs this year. The disruption could be felt very soon, and procurement managers will already be reviewing sourcing alternatives.

Higher tariffs on semiconductors won’t be rolled out until 2025, providing a strong incentive to bring forward any plans to import from China. Ironically, this may create the very export surge from China that the Biden Administration says it wants to prevent. However, China is not a big supplier of semiconductors to the USA in the first place.

Natural graphite, magnets, and medical gloves shipments from China won’t get hit with higher tariffs until 2026. This will delay any supply chain responses, especially if President Biden is re-elected and if there are doubts that he will follow through on these tariff measures.

As mentioned above, the other consideration is the amount of sourcing from China in the first place. In the case of EVs, China already faces 25% tariffs, and few are currently shipped to the USA.

In summary, the near-term disruption for supply chains will be concentrated on a small number of products. This is not welcome for the firms affected, but Biden’s May 2024 tariff moves do not presage widespread upheaval. Indeed, some analysts have argued that Biden’s recent tariffs amount to election-year window dressing and were designed to look tough but disrupt little. Optics matter. To date, Chinese retaliation has been uncharacteristically modest, reinforcing assessments that Biden’s May tariff move was electoral smoke and mirrors.

So, is Biden’s move no big deal? 

Not so fast. Where Trump was erratic and transactional in his dealings with China, Biden’s team has been methodical and persistent. Current US Administration officials deemphasize decoupling from the Chinese economies but reckon there needs to be “a small yard and a high fence.” By this, they mean that some sectors and technologies are — or should become — off-limits to Chinese buyers, firms, and investors. A ramping up of restrictions on inbound and outbound investments and technology sales involving all or selected Chinese firms has been the hallmark of Biden’s first-term trade policy.

Indeed, the May 2024 tariff measures apply to some sensitive sectors where China is effectively excluded from US markets. Those tariff measures often involve eye-watering increases in import taxes (up to 100% in some cases and far in excess of what Trump imposed), which is a testament to the height of the fence Biden seeks.

If the Biden team could state once and for all the commercial deals it is prepared to allow and those it doesn’t, then executives could plan. However, technology evolves over time — as do Chinese tactics to circumvent US controls — and, not unreasonably, Washington, D.C., reserves the right to change the terms of commercial engagement with China.

This raises fears that the yard will expand over time and the fence will get higher — even if Biden wins re-election. Such situations clearly call for scenario planning. After all, Trump’s plans for higher tariffs on China’s imports are well known.

The other big unknown is how China will ultimately respond. The Biden team informed Beijing weeks in advance of its tariff hikes — probably on the grounds that no one likes surprises. So far, Beijing has turned the other cheek and has not hit back. Many trade policy analysts reckon China won’t retaliate too forcefully or publicly for fear of increasing the odds Biden will lose being re-elected. The argument that clinches it for many observers is surely that President Xi and his new team don’t want to see Trump return to the US Presidency, not least because of the latter’s threat to impose an additional 60% across-the-board tariffs on US imports from China.

I am not so sanguine. President Xi’s newish team is widely regarded as very nationalistic and may want to burnish these credentials by striking back against US exports at a time of their choosing. Moreover, given Donald Trump’s self-professed admiration for “strong men” (a group that includes Xi), the Chinese may estimate that for all Trump’s bluster, they can reach a deal with him that is preferable to anything Biden’s team is likely to offer. We will see how long Beijing holds its punches.

Is this episode over? Are any other trade policy threats on the horizon?

Biden’s team probably hopes it has done enough to protect its standard bearer against accusations of going soft on China, but that doesn’t mean that trade diplomacy is over for the year. US policy has been to systematically cultivate support from other Western governments for its approach to Chinese commercial relations. In this regard, developments at the G7 are what to watch.

Created in the 1970s and expanded, the G7 is a club of Europe’s four largest economies (France, Germany, Italy, and the UK), as well as Japan, Canada, and the United States. Their government leaders and ministers meet often. In fact, for some time now, US officials have sought to persuade counterparts in the G7 that Chinese industrial policies, subsidies, and outright trade restrictions are a first-order threat to Western living standards.

If last week’s G7 Finance Ministers and Central Bankers’ communiqué is anything to go by, the US has succeeded. The third paragraph of this declaration states: “We will enhance cooperation to address non-market policies and practices and distortive policies, including those leading to overcapacity through a wide range of policy tools and rules to ensure a global level playing field. While reaffirming our interest in a balanced and reciprocal collaboration, we express concerns about China’s comprehensive use of non-market policies and practices that undermine our workers, industries, and economic resilience.”

The way the G7 works is that prominent statements found high up in the Finance Ministers’ communiqué tend to find their way into their Leaders’ Declaration. Ultimately, the question is whether the G7 will back these words with deeds. A similar declaration in June 2023 by the US and five allies (three are G7 members) went nowhere — or, at best, can be viewed as coalition-building. Given the divisions in Europe between firms and governments over the merits of decoupling with China, concerted action by the G7 against China this year is far from assured.

Still, the fractures in the world economy are widening. Executives who operate or source from Chinese firms in sectors where there is said to be excess capacity in China should be on alert. Those sectors include, at minimum, aluminum, cement, construction, electric vehicles, solar panels, and steel. That Chinese exports blocked from the US can be deflected to other foreign markets means executives from Western Europe, Japan, and emerging markets need to keep trade policy developments on their radar as well.

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

To read the full column as it was published by IMD, click here.

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Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

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It is taking steps to rebalance its position in the global economy. While seeking to preserve the benefits of interdependence with the rest of the world, the European Union is contemplating policies that would induce change. One change seeks to alter the footprint of global production for certain goods, affecting whom it sources imports from and whom it sells exports to. It wants to decrease certain trade dependencies (which could be weaponized) and increase others (to encourage diversification). A second change is the enactment of new contingent policy instruments intended to allow the European Union to respond more quickly when policymakers in other countries act badly (or to establish a credible threat sufficient to deter them from doing so in the first place).

This paper describes how the European Union is seeking to use trade and industrial policy to achieve its economic security objectives. It identifies some of the economic costs and tradeoffs of using such policies. Because the issues it examines—many of which are noneconomic, for which reasonable estimates of costs and benefits are lacking—are evolving, the paper shies away from normative recommendations. Instead, it explores the political economy of what is emerging and why. The paper focuses on EU efforts to “de-risk” vis-à-vis China especially, given the emphasis EU policymakers now place on doing so.

The paper is organized as follows. Section 2 defines the concept of economic security and the events that led it to play such a sudden and prominent role in modern policy. It provides some early evidence to motivate the new policy interventions but emphasizes that much remains unknown, especially concerning their design.

Section 3 explores a case study that highlights the difficult choices the European Union faces in responding to threats to its economic security. The case study involves the electric vehicle (EV) industry, the European Union’s potential use of trade defense instruments (TDIs) to address unfairly subsidized imports from China, and China’s potential retaliatory response of placing export restrictions on graphite, a critical material needed to manufacture EV batteries. It also identifies unknowns facing policymakers seeking “a clear-eyed picture on what the risks are,” in the words of European Commission President Ursula von der Leyen. The section also explores empirically whether the European Union’s trade interdependence with China may be deepening—despite stated goals to de-risk—in part because of the third-country effects arising from the US– China trade war.

Section 4 introduces the policy instruments the European Union, its member states, and other governments are pursuing to address concerns about their economic security. They include stockpiling and inventory management, investment or production subsidies, various forms of tariffs, export controls, and regulations on foreign investment. This section also highlights proposals for new policy instruments, analyzes the associated tradeoffs, and briefly describes basic World Trade Organization (WTO) rules that might discipline such instruments.

Section 5 turns to the potential for selective international cooperation over the use of such policy instruments. It explores how countries facing common concerns over economic security have been acting in coordinated fashion— implicitly or explicitly—and the difficulties of doing so.

Section 6 concludes with some caveats and lessons from history.

Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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Trade wars are usually bad for the countries involved. After the U.S. and China launched tit-for-tat tariffs on imports from each other in 2018, prices rose for American consumers, jobs were lost and corporate profits fell. Economic growth in both countries slowed. 

There was also some fear that the Trump administration’s tariffs, which hit other U.S. trading partners, would suppress global exchange and lead to a new period of protectionism. 

But for countries not in the middle of the trade war, research suggests, the opposite happened. 

In a working paper, UCLA’s Pablo Fajgelbaum, Yale’s Pinelopi Goldberg, UC Berkeley’s Patrick Kennedy, Yale’s Amit Khandelwal and the World Bank’s Daria Taglioni describe how “bystander countries” — those on the sidelines of the U.S.-China dispute — increased their exports of products subject to the tariffs to both the U.S. and to the rest of the world. (Exports to China were mostly unchanged.) 

The findings suggest that these countries didn’t just shift goods from their existing trading partners to fill a gap caused by the higher tariffs. Instead, they were able to boost production and increase exports of targeted goods into new and expanded markets. Overall, bystander countries increased their exports of taxed items an average of 6.7% during the period studied, compared with nontaxed products.

Winners and Losers 

“The trade war created net trade opportunities rather than simply shifting trade across destinations,” the authors write. 

Not all countries benefited, though. Some — notably Vietnam, Thailand, Korea and Mexico — were able to boost exports significantly, in part by providing substitutes for goods subject to the U.S.-China tariffs. Others, such as Ukraine and Colombia, saw a decline, largely because their exports complemented goods hit by the tariffs. 

The U.S.-China trade war began in mid-2018 when then-President Donald Trump hit China with a series of rising tariffs on a variety of imported goods and China retaliated by raising duties on U.S. products. (At the same time, the Trump administration also imposed duties on steel, aluminum and machinery imports from other trading partners.) The U.S. tariffs affected about $350 billion in imports from China, or about 18% of the total, while China’s tariffs covered about $100 billion, or about 11%, of goods imported from the U.S. 

Although trade tensions eased in 2020 when the two countries agreed to put a freeze on plans for additional trade duties, the existing tariffs remain in place.

Tariffs Caused a Huge Shift in Trade

The tariffs quickly had an impact. An analysis by the Peterson Institute for International Economics found that in 2022, Chinese imports subject to the highest U.S. tariffs — including semiconductors, furniture and some consumer electronics — were about 25% below their levels before the start of the trade war. The decline wasn’t due to a larger economic slowdown — Chinese imports that weren’t covered by added duties, such as laptops and computer monitors, increased by 42%.

But what about the rest of the world? To see how the trade war affected exports from bystander countries, the authors examined data from the United Nations’ Comtrade database about the trading patterns of the 48 largest exporting countries, (excluding oil exporters) between 2014 and 2019. 

They found that bystanders increased exports to the U.S. for products with high tariffs, but not to China. Shipments to the rest of the world increased for products subject to both U.S. and Chinese tariffs. Not only was there considerable variance among exporting countries, but also the most successful were those that were able to increase exports to the rest of the world, not just to the U.S. 

Two factors seem to explain the difference. For one, successful exporters tended to ship goods that were substitutes for Chinese imports. So when U.S. customers looked for a replacement for, say, smartphones made in China, countries like Vietnam that made phones were poised to benefit.  

What’s more, they were able to scale up production and achieve economies of scale so that the unit costs of their goods fell. This meant that the countries not only could compete successfully with the higher cost of taxed items, but their products became more competitive in markets that weren’t subject to the tariffs. 

Vietnam, for instance, was one of the biggest winners from the trade war, increasing its exports of tires, sweatshirts and vacuum cleaners to both the U.S. and the rest of the world. 

The study also suggests that successful countries weren’t just lucky enough to already specialize in products that would increase in demand after the trade-war tariffs hit. Instead, country-specific factors — such as a strong labor market or preexisting trade agreements — likely accounted for all the variation among countries.

Michael Totty is a freelance reporter and editor. Previously, he was a news editor with the Wall Street Journal in charge of assigning and editing Journal reports on technology, energy, health care, management and other topics. Totty works from Berkeley, California.

To read the full research brief, please click here. 

To read the full report as it was originally published by the National Bureau of Economic Research, click here.

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THE NUMBERS: Average U.S. tariff rates,* 2022 –

Women’s underwear 15.5%

All underwear 14.7%

Men’s underwear 11.5%

Steel 5.7%

All goods 3.0%

* “Trade-weighted,” combining tariffs collected on all imports, including those under MFN tariff rates, Chinese products subject to “301” tariffs, and FTA/preference products exempted from tariffs.

WHAT THEY MEAN:

Worst Valentine’s Day surprise ever: The U.S. tariff system taxes women’s underwear more heavily than men’s. Facts follow:

1. Steel vs. Underwear: First, tariffs are fundamentally a form of taxation, and tariffs on underwear are high. A Google search this morning finds “about 144,000” uses of the phrase “steel tariffs” and “about three” (3) of the phrase “underwear tariffs.” But despite the domestic and international controversy over steel tariffs, clothing tariffs in general and underwear tariffs specifically are lots higher. In 2021, automakers, building contractors, and other metal buyers ferried 28 million tons of steel in from abroad for $44 billion, and paid the Customs Service $2.5 billion in tariffs. Thus the “average” tariff on steel came to about 5%. Buyers of clothing, meanwhile, bought 5.5 million tons of clothes for $109 billion and paid $16 billion on it, for an average of 14.5%. Underwear makes up about a tenth of clothing imports — 519,000 tons or 3.4 billion articles, at $10.1 billion last year — and brought in $1.54 billion in tariff revenue. The average underwear tariff, therefore, was 14.7%* or about three times the rate on steel.

2. Tariff Rates: Second, the U.S. tariff system taxes women’s underwear at higher rates than men’s. To dip briefly into Customs-and-trade-policy jargon, underwear tariffs are published in Chapter 61 of the Harmonized Tariff Schedule** (“Knitted or Crocheted”), headings 6107 and 6108, and in Chapter 62 (“Other than Knitted or Crocheted”) headings 6207, 6208, and 6212. Together these five sections spread out over 17 pages and include 68 separate tariff “lines,” from line “61071100,” for men’s cotton underpants and briefs, to line “62129000,” a catchall for unclassifiable and possibly exotic things. The rates in these 68 lines range from 0.9% to 23.5%, diverging mainly along lines of class and gender. Among the products with clearly comparable female and male items, (a) aristocratic silks are lightly taxed, at 2.1% for women’s panties and 0.9% for male boxers and briefs; (b) the analogous working-class polyesters are heavily taxed, at 14.9% for men and 16.0% for women; and (c) middle-class cottons are, well, in the middle, at 7.6% for women and 7.4% for men. The highest rates fall on women’s products in heading 6212 with no obvious masculine counterpart: brassieres in a range from 4.8% (silk) to 16.9% (cotton or polyester), girdles 20%, and corsets 23.5%.

3. Costs: Third, tariffs on underwear, like consumer goods tariffs generally, are eventually paid by shoppers. Since Americans buy more women’s underwear than men’s, and since it is more heavily taxed, Customs raises more money from the women’s stuff. About three quarters of the $1.54 billion in underwear tariffs last year — $1.23 billion on $7.90 billion in imports, for an average rate of 15.5% — came from women’s underwear. Men’s brought in $306 million on $2.65 billion, for an 11.5% average. Peering a bit more closely, the $1.23 billion in lingerie tariffs came from 3.28 billion separate articles — i.e., about 37 cents per piece. The $306 million on men’s products came from 1.28 billion separate articles, or about 24 cents each. Markups, domestic transport costs, sales taxes, and so forth appear to have roughly tripled the prices of clothing*** from border to cash register last year, with tariffs amplified a bit at each stage. While precise figures would vary with the price of the item, on average the tariff system appears to add about $1.10 to the cost of each women’s underwear item, and 75 cents to men’s.

4. Comparisons: In international context, the U.S.’ underwear tariff rates as an overall average are pretty typical. But the U.S. system is (a) very unusual in taxing luxuries more lightly than mass-market goods, and (b) possibly unique in taxing women’s underwear more heavily than men’s. Most tariff systems have flat rates applying to all underwear: 5% in Australia, 10% in New Zealand, 18% in Canada, 20% in Colombia, also 20% in Jamaica, 25% (with an anti-poor twist, see below) in India, 30% in Thailand, an eyebrow-raising high 45% in South Africa, and so on. The Japanese and EU tariff systems in fact have a modest pro-female tilt, as they impose lower rates — zero in the Japanese case, 6.5% in the EU — on products in the 6212 heading, such as brassieres and corsets, as against flat rates of 9% and 12% for the rest.

As to the U.S., shifting from the jargon of customs and trade to that of policy analysis and evaluation: Seriously?! Boo! Do better!

Nonetheless, we still wish readers a happy and romantic Valentine’s Day.

* Up from 12.0% in 2017. This increase to some extent reflects the “301” tariffs on Chinese-stitched brassieres, briefs, etc. imposed in 2019, but other factors are at work as well. Both China and zero-tariff Central America have also lost market share, while MFN suppliers in Bangladesh, Vietnam, Cambodia, Indonesia, and India have gained relative to both.

** Some other clothing items show up in Chapters 42 and 48 — respectively leather and rubber products — but underwear of these types have no specific tariff line, so left out of the analysis above.

*** Clothing spending by consumers was about $400 billion last year; import value at the border $110 billion; 98% of clothing is imported.

FURTHER READING:

The U.S. International Trade Commission maintains the U.S. Harmonized Tariff Schedule. Check Chapter 61, sections 6107 and 6108, and Chapter 62, sections 6207, 6208, and 6212 for underwear.

And the ITC’s Dataweb requires a bit of HTS expertise but appears unique in the world in allowing ordinary citizens to get not only tariff rates but very detailed information on U.S. exports, U.S. imports, and tariff collection, by product and country.

Background:

Is the anti-female tilt of underwear tariffs typical of the American tariff system, or a weird anomaly? Overall, the “class” bias, in which silks and cashmeres are taxed lightly while cottons are taxed heavily and polyester and acrylics most of all, is the norm for U.S. consumer goods tariffs. The “gender” bias, in which women’s underwear attracts higher tariffs than analogous men’s goods, seems less systematic though still the rule. Asked to study these questions in 2018, ITC economists concluded the following:

“… [T]ariffs act as a flat consumption tax. Since a flat consumption tax is a regressive tax on income, tariffs fall disproportionately on the poor. Across genders, we find large differences in tariff burden. Focusing on apparel products, which were responsible for about 75% of the total tariff burden on U.S. households, we find that the majority, 66%, of the tariff burden was from women’s apparel products. In 2015, the tariff burden for U.S. households on women’s apparel was $2.77 billion more than on men’s clothing. … . This gender gap has grown about 11% in real terms between 2006 and 2016. We find that two facts are responsible for this gender gap: women spend more on apparel than men and women’s apparel faces higher tariffs than men’s.”

ITC’s look at gender and class bias in the tariff system.

PPI’s Ed Gresser on U.S. consumer goods tariffs as taxation.

And Miranda Hatch in the BYU Law Review on the tariff system and gender bias.

Around the world:

The European Union tariff system has a 12% tariff on all briefs, panties, and boxers whether cotton, silk, or polyester, and whether designated “men’s and boy’s” or “women’s and girl’s,” and a lower 6.5% on brassieres and corsets.

Japan’s is 9% on comparable things and duty-free on brassieres and corsets.

Australia is at 5% all the way through.

India has an anti-poor tilt (many items get “25% or Rs25, whichever is higher,” in practice meaning >25% rates for anything costing less than $1.25 per item, so in practice cheap goods important to low-income families will be taxed more heavily than expensive luxuries), but no divergence in men’s and women’s rates.

Canada is 18% all the way through.

And Jamaica 20%.

And some trade-and-gender links:

WTO’s Informal Working Group on Trade and Gender.

… and a nine-expert panel (“Does Trade Liberalization Have Gender’s Back?”) from last December’s.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank Progressive Economy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

To read the full article, please click here. 

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The United States wasted no time in rejecting the findings, with U.S. Trade Representative Katherine Tai commenting that the WTO was “on very, very thin ice,” prompting angry reactions in Europe. The cases have made the critical work of restoring a consensus on WTO reform considerably more difficult. 

While reactions to the panel decision and its aftermath have focused on the Biden administration’s rejection and what it portends for the WTO, that reaction would have been the same regardless of the product and circumstances, and every U.S. president since Truman would have done the same. Any effort to move beyond this new crisis needs to start with recognizing that fact and accepting that bringing such damaging and shortsighted cases should be avoided in the future.

From the outset of the WTO’s predecessor, the 1947 General Agreement on Tariffs and Trade (GATT), the United States has been clear in its position that a party to the GATT and WTO may judge for itself when its national security interests justify raising tariffs or otherwise disregarding multilateral trade rules. Trade experts should not be second-guessing such decisions. The United States was not alone in taking this position; at various times, many other members have agreed, including some who would later challenge the U.S. steel tariffs such as the European Union and Norway. 

This position was minimally disruptive to the trading system because of a strong norm that national security was to be invoked only rarely, and because creative trade diplomacy contained the fallout when it was. That norm was broken during the Trump years, not only when he initiated several national security investigations ranging from steel to autos, but when others, including China and Russia, increasingly restricted trade in the name of national security. 

In response, WTO parties began to litigate the fundamental question of whether national security decisions could be reviewed. This was a lose-lose proposition since a clear finding for the U.S. position could open the door for abuse. And a finding against the U.S. position would almost certainly be disregarded, to the detriment of the system’s credibility. 

But even more fundamentally, the decision to bring the case was pointless. The same relief — the right to raise tariffs on U.S. goods — was available without touching this third-rail issue. When a WTO member fails to implement an adverse decision, the member bringing a case is permitted to raise duties on the losing party’s goods. But the U.S. has in the past acknowledged that others may retaliate against national security measures and it was willing to litigate the amount. That solution was likely available here and would have spared the fallout from having the WTO second guess a member’s national security decisions. That this solution was not pursued was a failure of diplomacy, and only reinforced the U.S. concern that the system has encouraged litigation over negotiation.

The national security decisions could not have come at a worse time for the WTO. WTO members have been discussing reforms that might lead to the restoration of the organization’s dispute settlement system to full functionality. The Trump administration hobbled the system by blocking appointments to its appellate body, acting on long-standing, bipartisan U.S. concerns that the body was overreaching its authority and making law. The path to restoring the WTO’s dispute settlement function lies in assuring the United States that the system can be trusted to respect its limits and that attempts by members to push beyond those limits through litigation will be rejected. The decision to bring the national security cases and the outcome of those cases is the opposite of reassuring. 

While these cases have complicated the path toward restoring the dispute settlement system, the effort must continue. For all its flaws, the system has played an important role in resolving and containing disputes. One need look no further than the trade wars unleashed by the Trump administration to see the value in a system that heads off escalating tit-for-tat duties between countries insisting on their own rectitude. And the system lends credibility to the multilateral rules that are the embodiment of international economic cooperation, and which our allies continue to insist serve as the baseline for our trade relations, even as we respond to new security and economic challenges that may require deviating from free-trade orthodoxy. 

Some in the United States may conclude from the national security decisions that the dispute settlement system should not be revived. But as the U.S. response illustrates in the clearest terms, a functioning dispute settlement system would not prevent the United States and its allies from going outside the system to take actions necessary to address China’s predatory targeting of key sectors, nor would it prevent the United States from addressing climate change or strengthening U.S. manufacturing. 

The WTO has no army. It has no black helicopters. Dispute outcomes are not U.S. law. The U.S. and others always can choose whether to comply, understanding that the complainant may raise duties on their goods if they do not — an option available in any event. But the system limits that retaliation to the impact of the inconsistent measure, avoiding cascading retaliation cycles. And the system brings stability to the vast majority of commercial transactions not implicated by the new challenges facing the global community.

Some U.S. trading partners may likewise conclude from the U.S. reaction to the national security decisions that the United States has no interest in multilateral rules or enforcement mechanisms. But any U.S. administration would have done the same, even during the decades when the United States was at the forefront of promoting the multilateral trading system. The outcomes should instead serve as a wake-up call that WTO members need to exercise greater restraint in litigating. Similar restraint must be directly built into the WTO enforcement mechanism itself so that it buttresses support for the system, rather than undermines it, for example, by codifying the past practice of limiting national security litigation to cover only the amount of retaliatory measures. 

Bruce Hirsh is principal at Tailwind Global Strategies. He previously served in senior positions at the Office of the U.S. Trade Representative and the Senate Finance Committee. 

To read the full paper, please click here. 

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To read the original report by the BYU Law Review, please click here.

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