By entering into a trade war, the US administration reached its goal to weaken the Chinese economy and protect certain industries, but this comes at a cost for the US economy itself, because GVCs are ubiquitous in most of the protected sectors. The increase in producer costs, caused by increased tariffs on goods for intermediate consumption, is detrimental to the competitiveness of US producers. This translates into losses of US market shares on export markets, adding to the toll of retaliation by China and other affected countries. Overall, US exports to the world post a sizeable decrease. Because of the tariffs in place as of February 2020, in our General Equilibrium setup, three quarters of the sectors decrease their value added in the US. Consistent with political economy determinants, these twists of value added are transmitted to production factors, leading to sizeable creation and destruction of jobs, and reallocation of capital to the benefit of protected sectors, mostly at the expense of their clients, i.e. downstream industries.
We would like to thank Eyal Frank and the participants of the NBER conference on 'Understanding Productivity Growth in Agriculture' for their valuable comments. The research leading to these results has received funding from the European Union's Seventh Framework Programme under Grant Agreement n° 290693 (FOODSECURE) and by the MIT Joint Program on the Science and Policy of Global Change (for a complete list of sponsors and U.S. government funding sources of this program, see http://globalchange.mit.edu/sponsors/). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
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