What is the impact of tariffs on global trade?

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The Impact of Tariffs on Global Trade

Tariffs and Global Value Chains

US-China Trade War and Global Supply Chains

The recent tariff increases between the US and China have had significant indirect impacts on third countries through global supply chains. The tariffs imposed by both nations have increased cumulative tariffs for other countries, particularly affecting close trade partners like Canada and Mexico, which face an additional burden of around $500 to $600 million. This is especially true for tariffs on Chinese imports in the US, which are often used as intermediates in production and then re-exported to third countries.

Tariff Rates and Global Value Chain Participation

Lower tariff rates are crucial for promoting participation in global value chains. Changes in tariff rates can have a cascading impact along supply chains, resulting in higher cumulative tariffs. Both faced and imposed tariff rates negatively impact sectoral global value chain participation. This effect is persistent even when considering cumulative tariff rates, highlighting the importance of liberalization efforts to benefit from the global production system.

Economic and Welfare Effects of Tariffs

Sino-US Trade Frictions

The additional tariffs between China and the US have reduced bilateral trade and affected overall imports and exports. The impact is more significant for manufactured goods than intermediate goods. The welfare effect in China has decreased by 0.163%, while the US has seen a slight improvement of 0.016%. The primary reason for China's welfare decline is the deterioration of the terms of trade, leading to a reorganization of global value chains.

Economic Impact of Tariff Hikes

Using a Computable General Equilibrium (CGE) model, it is estimated that a one percentage point increase in import tariffs worldwide would decrease global trade by around 1.7% and global GDP by around 0.2%. This suggests that protectionist policies could reduce the growth of both global trade and the global economy. Additionally, the US tariffs on steel and aluminum imports in 2018 protected specific sectors but had a negative macroeconomic impact on the US economy.

Sector-Specific Impacts

Global Forest Sector

The China-US trade war has significantly impacted the global forest product markets. For instance, China's imports of sawnwood and waste paper from the US and the US imports of plywood and other paper from China have decreased. This has led to trade shifts to other parts of the world, with Vietnam and New Zealand benefiting the most, while Thailand suffered losses. Product substitution mainly occurred in Asia and Europe, with price changes within 10%.

Agricultural Markets

Retaliatory tariffs imposed by China on US agricultural products like pork, soybeans, corn, and wheat have led to trade destruction and diversion. For example, US pork exports declined by 4.7% by the end of the projection period. These tariffs have also affected global greenhouse gas emissions from land-use changes.

Environmental and Health Implications

Carbon and Health Implications

Trade restrictions can lead to a reduction in global export volume, GDP, carbon dioxide emissions, and PM2.5-related mortality. An extremely anti-trade scenario with additional tariffs would reduce global export volume by 32.5%, GDP by 9.0%, carbon dioxide by 6.3%, and PM2.5-related mortality by 4.1%. This suggests that while trade restrictions can have economic downsides, they may also lead to environmental and health benefits.

Conclusion

Tariffs have far-reaching impacts on global trade, affecting supply chains, economic welfare, sector-specific markets, and even environmental and health outcomes. The cascading effects of tariffs highlight the importance of liberalization efforts to mitigate negative impacts and promote global value chain participation. The US-China trade war serves as a critical example of how tariffs can disrupt global trade dynamics, leading to both economic losses and shifts in trade patterns.