Question

The benefits of the trade war on the U.S. and China.(better to be specific)

Answer 1

Using a dynamic model rich enough to incorporate different groups of workers, yet simple enough to yield intuitively appealing results, the distributional consequences of protectionism over time. If the US were to raise its import tariff without retaliation from China, the standard terms-of-trade externality would apply and aggregate consumption would rise. However, the effects are dramatically different across workers and time. In the short run, workers in the exporting sector lose as labour demand shifts towards the import-competing sector, while workers in that sector gain. In the long run, skilled workers lose as labour demand shifts toward the unskilled-intensive import-competing sector, while unskilled workers gain. Different types of workers have dramatically different preferences for optimal tariffs, and those preferences also depend on the time horizon. The sector of employment matters more for short-term-oriented workers, and the skill class matters more for long-term-oriented ones.

The distributional effects are similar in case of a trade war, i.e. if China responds to higher import tariffs in the US by retaliating in kind. During a trade war, the terms-of-trade externality no longer works and aggregate consumption falls. In the long run, skilled workers experience large losses in income and consumption, while unskilled workers are hardly affected. In the short run, workers employed in exporting sectors lose much more than those in import-competing sectors. In fact, unskilled workers in import-competing sectors actually gain in the short run. Thus, it is no wonder that, despite the overall negative effects, protectionism can find political support, even under the threat of a trade war, especially if re-election is only a few years away!