Trump’s policies could reduce US trade by 20 percent

What will it cost to ‘Make America Great Again’? According to analysis by University of Groningen academics, the result could be a 20 percent reduction in the United States’ trade. That’s what could happen if the protectionist policies of US President Donald Trump result in a full trade war, as appears increasingly likely.

Groningen economists Steven Brakman, Harry Garretsen, and Tristan Kohl define a trade war in their model as the US increasing trade costs by 30% on goods from Canada, Mexico, China, the EU and India; and these countries responding with the same penalty on US goods.

The result of a trade war

They calculate the result of a trade war would be severe on countries that are highly dependent on the US for trade. Canada’s trade would be hit by 10.4 percent, while Mexico’s trade would suffer by 7.2 percent. China and India would hit by 2.3 percent and 2.5 percent respectively according to their calculations, while the trade of EU countries would be reduced by between 1.5 and 2.8 percent.

But nowhere would be worse hit than the US, because other countries remain able to trade with each other unaffected by US-specific tariffs. Countries that have alternative markets to trade with nearby are less affected: Dutch trade for example would be hit by just 1.5 percent.

Trade is welfare-increasing on principle

The effect on countries’ gross domestic product follow the same pattern. The most exposed country is Canada, which could see its GDP decline by 1 percent, followed by Mexico with 0.3 percent. The US’ own GDP would be hit by 0.2 percent in this model, with the same effect on average seen across the EU.

These results reflect a consensus among economists that while trade does create winners and losers, it is welfare-increasing on principle, and tariffs make countries and their citizens worse off.

The effect on 63 countries

This online table (no longer available) breaks down the effect on the trade and GDP on the 63 countries included in the study in four steps: an initial 15 percent trade cost increase by the US; a retaliatory 15 percent increase by Canada, Mexico, China, the EU and India; a further 15 percent increase by the US; and the same response from the other countries. The full results are outlined in this blog.

More information

• Contact: Professor Steven Brakman

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