The tariffs imposed by president Donald Trump and his Chinese counterpart Xi Jinping have hit firms in their own countries almost as much as the ones they were aiming at, according to research that shows the trade war has partly backfired on both nations.
Academics scrutinised stock market responses in order the gain a real-time assessment of the impact of the trade war that was harder to retrieve from economic data that were often out of date or affected by other events.
Peter Egger a professor at ETH-Zurich university and Jiaqing Zhu at Guangdong University of Foreign Studies, found that while the trade war tariffs of the US and China directly hurt targeted firms and sectors abroad as intended, they indirectly affect stock prices through global value chain linkages in the US, China, and in third economies which do not directly participate in the trade war.
The research, published on the economic portal VoxEU, found that US tariffs boosted share prices of some American companies by up to 7 per cent but cut the value of others by up to 2 per cent. While some Chinese firms share prices were hit, others gained. Looking at China, tariffs imposed by Beijing had a similar negative impact on domestic firms as well as hitting US companies.
Because of the way that modern supply chains extend cross borders, the business activities of virtually all sectors and countries are linked to each other, which meant that other countries’ firms suffered indirect impacts.
“Our analysis shows that there are unintended effects of the trade war on the US and China, as well as on third parties, mediated by global value chain interdependencies,” they said.
“The results suggest that there is an irony to the US-China trade war in that it appears to have resulted partly in the exact opposite of what was intended. Instituting well-targeted protectionist tariffs in such a world is not easy and eventually, as in the example of the US-China trade war, hurts those they are meant to protect.”
The authors said that as with Brexit, stock market investors were much more concerned about the economic turmoil that protectionist policy announcements might trigger than the politicians proposing them appeared to be.
Mr Egger and Mr Jiaqing added that slapping a tariff on the products of a sector was equivalent to raising the price for these products for domestic buyers.
Their findings echoed research for NBER, the US think tank, that showed this week that US tariffs continues to be almost entirely borne by American firms and consumers.
Just before the end of 2019, research by the US Federal Reserve found that Trump's tariffs had led to job losses in the manufacturing sector and higher prices for producers and consumers.
Figures earlier this month showed that activity in the US manufacturing sector contracted in December 2019 for the fifth month in a row, falling to its weakest level in more than 10 years.
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