A Theoretical Perspective on the Economic Effects of U.S.–China Trade Disputes

Hiroshi Mukunoki

No 953, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This study examines the economic effects of U.S.–China trade disputes from a theoretical perspective, focusing on tariffs, trade policy uncertainty, relocation to third countries, and export restrictions. Since 2018, the U.S. and China have imposed additional tariffs and other restrictive trade measures, significantly impacting global trade dynamics. This study surveys the existing literature and develops theoretical models to evaluate the consequences of these actions. First, it analyzes the welfare effects of tariffs, emphasizing the role of tariff pass-through and trade policy uncertainty. Empirical evidence indicates a near-complete tariff pass-through, suggesting that U.S. tariffs have increased costs for domestic consumers, while offering limited protection for domestic producers. Second, this study employs a Melitz-type model to explore firm relocation patterns, showing that medium-productivity firms tend to shift production to third countries. Finally, the study investigates the effects of export restrictions and proposes a quality-sorting model to evaluate the impacts of a “maximum quality ceiling” on export products. The results indicate that such restrictions discourage R&D investments, lower product quality, and lead to resource misallocation, harming economic efficiency.

Keywords: U.S.–China; Trade; Disputes|Tariff; Pass-Through|Firm; Relocation|Maximum; Quality; Ceiling (search for similar items in EconPapers)
JEL-codes: F13 F23 F51 (search for similar items in EconPapers)
Date: 2025-03
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Published in IDE Discussion Paper = IDE Discussion Paper, No.953. 2025-03

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