Shooting Oneself in the Foot? Trade War and Global Value Chains

CEPII Working Paper No 2019-18

41 Pages Posted: 24 Feb 2020 Last revised: 17 Apr 2020

See all articles by Cecilia Bellora

Cecilia Bellora

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Lionel Fontagne

University of Paris 1 Panthéon Sorbonne; Paris School of Economics; CEPII

Date Written: April 16, 2020

Abstract

Despite the “Phase One Deal” agreed on mid-December 2019, bilateral tariffs between US and China remain at unprecedented high levels, which will have long-lasting effects. US tariffs remain very high on parts, components and other intermediate products; similarly, only the last wave of Chinese retaliatory tariffs has been half cut. We investigate in this paper how such tensions between highly interdependent economies will impact trade, income and jobs. We rely on a set-up featuring General Equilibrium, imperfect competition and importantly differentiating demand of goods according to their use, for final or intermediate consumption. This authorizes tracing the impact of protection along the value chains, on prices, value added and factor income. Additional tariffs from official lists are taken into account at the tariff line level, before being aggregated within sectors. Beyond the direct toll of sanctions, US exports to the world post a sizeable decrease as a result of reduced competitiveness led by vertical linkages along the value chains. Because of the tariffs in place as of February 2020, three quarters of the sectors decrease their value added in the US. Consistent with political economy determinants, these twists of value added are transmitted to production factors, leading to sizeable creation and destruction of jobs, and reallocation of capital to the benefit of protected sectors, mostly at the expense of their clients. Ultimately, this paper sheds light on the economic consequences of policies disrupting global value chains.

Keywords: Trade War, Global Value Chains

JEL Classification: F13, F17

Suggested Citation

Bellora, Cecilia and Fontagne, Lionel and Fontagne, Lionel, Shooting Oneself in the Foot? Trade War and Global Value Chains (April 16, 2020). CEPII Working Paper No 2019-18 , Available at SSRN: https://ssrn.com/abstract=3526944 or http://dx.doi.org/10.2139/ssrn.3526944

Cecilia Bellora

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

20 avenue de Ségur
Paris, 75007
France

HOME PAGE: http://www.cepii.fr/

Lionel Fontagne (Contact Author)

University of Paris 1 Panthéon Sorbonne ( email )

Maison des Sciences Economiques
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Paris, 75013
France
+33 1 44 07 89 94 (Phone)
+33 1 53 68 55 01 (Fax)

HOME PAGE: http://lionelfontagne.weebly.com/

Paris School of Economics ( email )

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HOME PAGE: http://lionelfontagne.weebly.com/

CEPII ( email )

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+33 1 53 68 55 06 (Phone)

HOME PAGE: http://lionelfontagne.weebly.com/

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