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Comment by Gabriel Felbermayr: "Customs threat not very credible"

06.05.2019

Kiel Institute President Gabriel Felbermayr considers US President Trump's recent tariff threat to be a bluff and refers to calculations on the consequences of the trade dispute, according to which the USA would have to accept welfare losses of up to 9.5 billion US dollars.

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Gabriel Felbermayr: "The US President appears quite frustrated. He had raised expectations of a breakthrough in the trade dispute with China for last Friday and has been unable to deliver so far. Now he is seeking salvation in new threats.

The threat to impose customs duties on the full amount of imports not yet covered by tariffs is not credible. According to our calculations, the US President first imposed customs duties on goods, where market conditions impose the bulk of the costs on China. If he now extends his punitive tariffs to the remaining products, he will inevitably hit goods for which the cost-benefit ratio for the US economy is particularly poor. While US producers tend to benefit, US consumers are burdened, sometimes considerably.

According to calculations, which roughly reflect the current situation, a loss of 5.7 billion Euros would be incurred in China based on real income, and a loss of 2.6 billion Euros in the USA. If the US and China were to impose a 25 percent tariff on all imports from the other country, corresponding to a value of 520 billion US dollars in goods from China and 100 billion US dollars in goods from the USA, this would result in welfare losses of 30.4 billion Euros for China and 9.5 billion Euros for the USA.

The EU is benefitting slightly in both scenarios, with welfare gains of 0.3 billion Euros and 1.2 billion Euros in a scenario with tariffs on all imports. But its trade surplus with the US would become even larger, threatening further transatlantic conflict."

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