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February 15, 2019

Tariffs from trade wars are changing the flow of world trade

A new study by the United Nations Conference on Trade and Development (UNCTAD) looks at the repercussions of existing tariff hikes by the United States and China.

“Because of the size of their economies, the tariffs imposed by Unites States and China will inevitably have significant repercussions on international trade,” said Pamela Coke-Hamilton, who heads UNCTAD’s international trade division.

“Our analysis shows that while bilateral tariffs are not very effective in protecting domestic firms, they are valid instruments to limit trade from the targeted country,” explained Ms. Coke-Hamilton. “The effect of US-China tariffs would be mainly distortionary. US-China bilateral trade will decline and be replaced by trade originating in other countries”.

The study estimates that of the $250 billion in Chinese exports subject to US tariffs, about 82% will be captured by firms in other countries, about 12% will be retained by Chinese firms, and only about 6% captured by US firms.

Similarly, of the approximately $110 billion in US exports subject to China’s tariffs, about 85% will be captured by firms in other countries, US firms will retain less than 10%, while Chinese firms will capture only about 5%. The results are consistent across different sectors, from machinery to wood products, and furniture, communication equipment, chemicals to precision instruments.

The reason is simple: bilateral tariffs alter global competitiveness to the advantage of firms operating in countries not directly affected by them. This will be reflected in import and export patterns around the globe.

According to the study, countries that are expected to benefit the most from US-China tensions are those which are more competitive and have the economic capacity to replace US and Chinese firms. The study indicates that European Union exports are those likely to increase the most, capturing about $70 billion of US-China bilateral trade ($50 billion of Chinese exports to the US, and $20 billion of US exports to China). Japan, Mexico and Canada will each capture more than $20 billion.

Link: Trade Wars: The Pain and the Gain

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