Geopolitical tensions: Modelling the costs of US-China tariffs

US-China Business Council

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The US has reaped substantial benefits from increased trade with China in the two decades since China acceded to the World Trade Organization (WTO). The tariffs imposed by the Trump administration in 2018 reversed the decades-long trend of greater US-China trade integration and, according to multiple assessments (e.g. the IMF, the US Trade Commission and academic studies), raised inflation and hurt US output and jobs. The US-China Business Council (USCBC) commissioned Oxford Economics to estimate the economic impact of an escalation of existing tariff measures, a policy scenario that several politicians in the US have backed publicly.

The Challenge

US-China trade supports a significant part of the US economy and corresponding jobs and incomes. The USCBC, a trade association working with businesses with meaningful commercial links to China, was concerned that hawkish political sentiment toward China might lead to decisions that overlook the US economy’s underlying benefits from commercial integration with China. By commissioning Oxford Economics to carry out this independent analysis using state-of-the-art modelling tools, the USCBC wanted to measure the effects of increasing trade tensions on the US economy and households.

The Solution

From the onset, Oxford Economics and the USCBC collaborated closely to define feasible and realistic assumptions to ensure the study’s relevance for policymakers.

Oxford Economics could draw on its longstanding macro and industry-level expertise, leveraging the latest methods in trade and macroeconomic analysis (including Purdue University’s GTAP model and Oxford Economics’ Global Economic Model and Global Industry Model) to derive credible estimates of the costs of higher tariffs for the US economy and our everyday lives.

Our models produced results for economic costs (e.g. inflation, incomes, interest rates) over a five-year horizon, not only for the US as a whole but also for specific industries and even regions.  Going beyond national aggregates to regional particularities catered to the differing policy scopes of politicians, increasing the study’s overall relevance. The research shed light on several ways tariffs affect the US economy, such as long-term capacity constraints driven by reduced productivity and innovation—points many decision-makers hadn’t considered before.  Our detailed analysis also gave decision-makers valuable input for future tariff-related policy debates.

The Result

The USCBC and Oxford Economics attracted high-level attention from politicians and media through promotional events and webinars. Several expert committees of Congress and the Senate responsible for informing decision-making on trade and finance matters requested virtual briefings. As a result, the USCBC was able to get involved in the policy debate and inform policymakers with new findings on key issues thanks to our research.

Based on the USCBC’s perceptions, our study took away momentum from tariff advocates in Congress and the Senate and reduced support for increased China tariffs among politicians.

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