Trade Wars and Industrial Policy along the Global Value Chains

We provide a quantitative evaluation of the welfare impacts of the US-China trade conflict starting in 2018. We first document that the first wave of tariffs on China imposed by the Trump administration targeted China’s Industrial Policy rather than Chinese imports. They are concentrated on high tech manufacturing industries emphasized by the Made in China 2025 (MIC 2025) initiative. These industries exhibit strong economies of scale, and have low elasticities of substitution of intermediate inputs. Motivated by these features, we extend the quantitative trade model developed by Caliendo and Parro (2015) by incorporating sectoral external economies of scale and nested-CES input-output linkages. We calibrate the model to 7 major economies and 95 disaggregated industries in 2016 and examine the impacts of the Trumpian tariffs and the “MIC 2025″ industrial policy. We find that the “MIC 2025″ subsidies actually increase the US welfare and their impact on China is also positive. The direct welfare effects of the Trumpian tariffs are small,-0.008% for China and 0.025% for the US. Finally, we examine the strategic interactions between China and the US in industrial policy, tariffs, and export controls.