During his presidential campaign, Donald Trump proposed adopting trade protectionist policies (e.g. 45%/35% tariffs on China/Mexico) in a bid to revive the US manufacturing sector and bring jobs back to the US. Will these policies boost US growth? What will be the implications for its major trading partners, such as China?

The uneven distribution of the benefits of globalization leads to the rise of trade protectionism, shaping the external policies of the incoming US government. With deepening specialization, the US manufacturing sector, especially labor-intensive industries, have gradually lost their competitiveness. Over the past two decades, the US has faced increasing income inequality. Its current account deficit remained substantial, even after it narrowed from the peak of 5.8% of GDP in 2006. Against this backdrop, President-elect Trump’s proposals to protect domestic employment and revive US manufacturing through trade protection were well received.

We conduct a simple quantitative analysis on the potential impacts of trade protectionist policies on the US and Chinese economies. As trade deal renegotiation, anti-dumping and other measures may eventually all raise import prices – such as tariffs – we put trade protection in perspective by considering a 5ppt rise in the average US import tariff.

It would push up US GDP growth by 0.12ppt, inflation by >0.24ppt and fiscal revenue to GDP ratio by 0.79ppt.

It would drag the world GDP growth down by >0.06ppt.

It might directly impact China’s GDP growth by >0.07ppt.

Thus, the impact of trade protection on US inflation would be more significant than that on US growth. In addition, some medium-/long-term impacts also merit attention:

Short-term impact may be larger than the medium-/long-term impact, given the spillback effect of the world trade setback.

The impact on financial markets may be greater than that on the real economy, considering the role of expectations in asset prices.

The impact on other emerging markets may be more visible than that on China, from the global value chain perspective.

Facing external demand uncertainties, China should refocus on domestic demand. The China-US trade imbalance is clearly an important concern for the incoming US government. The external pressure highlights the importance for China to push forward structural reforms and promote domestic demand.

Nevertheless, if China-US trade frictions escalate, China will not lack policy options. The main US exports to China include aerospace equipment, electronic equipment, machinery and plant products. In particular, the US is highly dependent on China’s demand for Boeing aircraft, soybeans and integrated circuits. If China were to retaliate by raising tariffs or launching anti-dumping probes, these US industries would come under non-trivial pressure.