The trade dispute between the United States and China has escalated over the past two years. At the end of 2019, additional tariffs had been imposed on around two-thirds of the total volume of goods traded between the two countries. It was partly due to this that the value of US imports of goods from China in the fourth quarter of 2019 was more than one-fifth lower than it had been in the second quarter of 2018, prior to the imposition of additional tariffs. Although the United States and China recently signed a phase one agreement to ease the trade dispute, the majority of the tariffs imposed will remain in force until further notice.

A Bundesbank study in the latest Monthly Report shows that the additional tariffs are likely to have weighed on economic growth in both countries. The Bundesbank’s experts predict that, if the additional tariffs imposed to date were to be maintained, real GDP in the United States would be 0.5% lower in the medium term than in an alternative scenario without additional tariffs. They anticipate similar losses for China. Consumers in the United States also have yet to benefit from the realignment of the country’s trade policy, the study finds.

No “lucky bystanders”

As part of their study, the Bundesbank’s experts also examined how the additional tariffs have influenced trade with third countries. If the United States no longer imports certain products from China on account of the tariffs, it could switch to products from third countries. Yet, according to the Bundesbank’s study, this has hardly been the case thus far. The empirical evidence indicates that no “lucky bystanders” have profited from the dispute between the United States and China to date, the economists write.

The United States has toughened its trade policy not only towards China, but also towards other countries. For example, in 2018 it imposed additional tariffs on solar panels, washing machines, steel and aluminium. The economists note that, as was the case with the measures imposed exclusively on China, these tariffs are unlikely to have yielded the macroeconomic benefits that the United States had hoped for.

The economists report that, relative to total trade in goods between the United States and the European Union, which amounts to just over US$800 billion, the share of goods affected by additional tariffs remains very low to date. However, they add, the United States has already threatened further tariffs on multiple occasions. With the aid of model simulations, the Bank’s experts conclude that an all-out trade war between the United States and the European Union could result in far greater damage to the global economy than the dispute between the United States and China.

Rising uncertainty worldwide

In its Monthly Report, the Bundesbank also warns of the rising trade policy uncertainty associated with the current disputes. The economists write that this is already likely to have weighed on investment and thus global economic activity. Using the example of the United States, they demonstrate that uncertainties arising from trade disputes can adversely affect the real economy via the financial markets.

Strengthening the World Trade Organization

Based on their findings, the Bundesbank’s experts advocate strengthening the rules-based trading system, with the World Trade Organization (WTO) at its heart. Though the WTO and its rules have increasingly come under fire in recent years, a targeted reform would require the constructive participation of all members of the organisation. Trade agreements such as those concluded on an ever more frequent basis by the European Union in recent times are nothing more than an imperfect substitute for a functioning multilateral order, the economists write.