Analysis of the trade conflict and initial assessment of the possible consequences

Using a model-based approach, the Thünen Institute has analysed possible economic effects of the current trade conflict between the USA, Europe, and Germany in three different scenarios. The findings in detail.

In the US, consumer prices and production costs in particular will rise in the short term, especially in import-dependent industries. Exports will also decline as retaliation tariffs will be imposed and the dollar may appreciate.

Effects on the German economy

In Germany, rising prices would primarily affect the industry sector: Production and exports of industrial goods would fall. Imports of industrial inputs for further processing would also drop, which could further impair competitiveness. Agricultural and food sectors, on the other hand, could benefit from trade diversion.

In the model-based analysis presented here, three policy scenarios (US_only, US_EU, and US_all) were calculated and compared with a reference situation (Base). These scenarios can be described as follows:

• Reference scenario (Base): Projection of market developments without tariff changes
• Scenario 1 (US_only): Only the US changes import tariffs. 
  Imports from the EU to 20 per cent 
  from China to 104 per cent
  from Japan to 24 per cent
  from all other countries to 10 per cent
  Note: If the tariff envisaged in the scenario is lower than the existing initial tariff for certain products, the tariff level is not adjusted in the model.
• Scenario 2 (US_EU): US tariffs as in US_only
  EU imposes retaliation tariffs of 20 per cent on imports from the USA
  Note: If the tariff envisaged in the scenario is lower than the existing initial tariff for certain products, the tariff level is not adjusted in the model.
• Scenario 3 (US_all): as scenario 2
  Other countries impose retaliation tariffs of 20 per cent on imports from the USA
  China levies a retaliation tariff of 84 per cent
  Note: If the tariff envisaged in the scenario is lower than the existing initial tariff for certain products, the tariff level is not adjusted in the model.
   

All three scenarios show that national income will fall worldwide. The US will experience the biggest losses. Here, national income is declining by almost 1.2 per cent in the US_all scenario (Figure 1).

The results show that global losses will essentially be spread across three regions or countries: the USA, China, and the EU. If the EU takes retaliation measures and imposes retaliation tariffs on US imports, this will lead to significant income losses in the EU as well. Such a policy would therefore have far-reaching consequences in the EU and would not come without its costs.

The economic losses in the US_all scenario total more than USD 270 billion worldwide if the USA and all other countries impose tariffs on each other's imports (Figure 2). As can be seen from figure 2, these losses are mainly distributed between the USA, which has to accept a loss of USD 174 billion, and China, where the loss is likely to be USD 50 billion. By contrast, the absolute losses in the EU are fairly low. In some other countries, which are summarised here in the ‘Rest of the world’ category, slight economic gains are possible.

Figure 3 shows the global changes in foreign trade. Compared to the relatively minor impact on international trade in agricultural commodities and processed foods, the US tariff conflict leads to a significant decline in global trade in industrial goods. Here, global exports fall by 3 per cent in the US_only scenario and by 7 per cent in the US_all scenario.

This decline would correspond to a loss of 6.2 billion US dollars (US_only) and 11 billion US dollars (US_all) in global trade of agricultural and food products (Figure 4). However, the declines in trade in industrial goods and services far exceed this  reduction in trade volume. In the worst-case scenario (US_all), the global trade volume declines by more than 940 billion US dollars and the volume of traded services by almost 250 billion US dollars.

The changes in global market prices, as shown in Figure 5, vary. The rising tariffs imposed by the USA (US_only) and the EU (US_EU) cause world market prices for the here selected products to fall slightly in the agricultural, food, and manufacturing sectors. In the event of a global trade conflict between all countries and the US, on the other hand, global market prices will rise slightly. 

A key reason for the (slight) rise in world market prices is the decline in international trade coupled with a significant shift in global trade relations, namely away from trade with the USA and towards trade relations with other regions. Whether the rising world market prices in the US_all scenario also reflect the distortion of international competition and the inefficient allocation of resources still needs to be analysed in more detail.

The following three figures 6-8 describe the effects on production (Figure 6), imports (Figure 7), and exports (Figure 8) in the USA triggered by the ‘new’ US trade policy.

While the US production of agricultural products and food declines in both the US_only and US_all scenario, the US_EU scenario triggers a slight increase in production in these sectors as shown in Figure 6.

With the increase in tariffs in the USA, imports - with the exception of dairy products - fall significantly. As expected, as the trade conflict escalates, US imports fall more and more sharply in the US_all scenario, specifically by 20 per cent for agricultural commodities, by around 25 per cent for food and by 35 per cent for imports of industrial goods.

In addition to imports, the increasing rise in US protection also affects US exports (Figure 8). It is visible that import duties, specifically the tax on foreign goods, have an indirect negative impact on exports. For several reasons: Firstly, higher import duties affect the exchange rate, as demand for foreign currency decreases as a result of declining demand for foreign goods. On the contrary, the US dollar appreciates and the international competitiveness of US goods decreases. 

Secondly, US companies are dependent on imported primary products or machinery. If these imports become more expensive due to higher tariffs, production costs in the US rise and, as a result, US goods become less competitive.

However, the low ‘impact’ of the European retaliation tariffs is also evident in this figure, as the decline in US exports is significantly lower in the US_EU scenario than in the US_only scenario.

The following figures 9 to 11 describe the effects on production (Figure 9), imports (Figure 10), and exports (Figure 11) in Germany, which are triggered by the ‘new’ US trade policy and possible retaliation measures by other trading partners.

The new US trade policy and possible retaliation measures by other trading partners have a noticeable impact on the German economy. Figure 9 shows a slight increase in the production of agri-food products in Germany. By contrast, the production of industrial goods would decline. 
Figure 10 illustrates that the decline in imports would primarily affect industrial goods.

Figure 11 highlights the effects on exports: While exports of German agricultural and food products increase, German industry suffers heavy losses due to falling exports of its goods.

Developments in German foreign trade show that the US tariffs affect different sectors to varying degrees. While the German agri-food industry can apparently redirect exports towards other destinations than the US, trade in industrial goods suffers from new trade barriers, such as retaliation tariffs or disrupted supply chains.