Trade war and the economy

Cheah, Lynn and Koh, Shin Jie and Lim, Yee Yen (2019) Trade war and the economy. Final Year Project, UTAR.

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Abstract

Trade war is mostly known as the economic conflicts between two and or more countries that impose tariff to harm each other’s trade. Trade war are no longer a new phenomenon in this century and are often known to economists and individuals. In 2018, United States triggered trade war with China by imposing tariff on Chinese products. This paper attempt to examine the overall impact of trade war between United States and China. Throughout the past studies about trade war, numerous researches focus more on explaining the impact of tariff war from partial equilibrium perspective, which only analyse some part of the market, assuming other factor remains fixed. Thus, we aim to establish the impact of US-China's trade war as a whole. In the other hand, we identified that trade war may not necessarily leads to economy recession, where sometimes the negative impact could be small or offset. We are using general equilibrium theory to study the impact of trade war and conducting three scenario analysis to do some prediction on the effect of trade war. These three scenarios included an additional 25% tariff in the United States, then China retaliated with a 25% tariff, and China implemented an expansionary fiscal policy in its country. According to our result of scenario analysis, it is suggested China could reduce the adverse effects of trade war by increasing in government spending or implementing expansionary fiscal policy. Overview the overall impact of these US and China trade war, China would hurt the most. China eventually would have negative impact far more than United States do if United States impose additional 25% on China import. We presume China take retaliate action by impose 25% on United States's import, in such situation, China have to pay for what it have done China would suffer again.

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