Trade Wars and Industrial Policy Competitions

Abstract

<p>In this paper, we provide the first quantitative evaluation of the impacts and interactions of the US-China trade wars and industrial policy competitions. To that end, we extend the model in Caliendo and Parro (2015) by incorporating sectoral external economies of scale. We find that (i) in the presence of sectoral economies of scale, the “Made-in-China 2025” (MIC2025) industrial policy tends to improve the welfare of both China and the U.S.; (ii) the US gains from Trumpian tariffs if China does not retaliate, and the gain is larger if China had already implemented its optimal subsidies to the “MIC2025” sectors; (iii) in a non-cooperative tariff game on the “MIC 2025” sectors, 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 sectors, the U.S. would reduce its tariffs on imports from China and benefit from its own industrial subsidies. Our results, therefore, provide a rationale for trade and industrial policy competitions in the U.S. and China.<br></p>