Trade Wars and Industrial Policy Competitions: Understanding the US-China Economic Conflicts

Jiandong Ju, Hong Ma, Zi Wang and Xiaodong Zhu

Working Papers from University of Toronto, Department of Economics

Abstract: We provide the first quantitative evaluation of the impacts and interactions of the US-China trade wars and industrial policy competitions. We extend the multi-country-multi-sector model in Caliendo and Parro (2015) by incorporating sectoral external economies of scale. We find that (i) under our baseline calibration of scale economies, the "Made-in-China 2025" ("MIC 2025") subsidies tend to improve the welfare of both China and the U.S.; (ii) the US gains from Trump administration's tariffs if China does not retaliate, and the gain is larger if China had implemented the "MIC 2025" project; (iii) in a non-cooperative tariff game targeting on high-tech industries supported by the "MIC 2025", both China and the U.S. impose high tariffs and endure welfare losses; and (iv) if it is feasible for the U.S. to subsidize its own high-tech industries, the U.S. would reduce its tariffs on high-tech imports from China and benefit from its own industrial subsidies. These results (i) provide a rationale for trade wars and industrial policy competitions between the U.S. and China, and (ii) suggest that industrial subsidies, if properly implemented, may generate less distortion than import tariffs as a means of international competition.

Keywords: Trade War; Industrial Policy; Scale Economies; Strategic Interactions (search for similar items in EconPapers)
JEL-codes: F12 F13 F17 F51 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2023-10-12
New Economics Papers: this item is included in nep-cna, nep-gth and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Trade wars and industrial policy competitions: Understanding the US-China economic conflicts (2024)
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