The impact of a full trade war on tariffs – UNCTAD
UNCTAD in June 2018 released a simulation of the impact of an all-out trade war on tariffs based on classical economic theory as validated by past observations. UNCTAD stands for United Nations Conference on Trade And Development.
According to the report, the U.S. would impose average tariffs of 30% (vs. 7% now); the E.U. would increase its own average tariffs from 3% to 35%; Canada from 3% to 53%; Mexico would go from almost nil to 60%. Even a very open trading economy such as Singapore would increase its tariffs from 2% to 33%.
Extremely higher tariffs are likely to cut international trade, increase prices, and reduce consumers’ choices as well as global mobility. We will be lucky if the resulting breakdown in global trade and economic slowdown does not spill over in social and political upheaval.
The Rationale Behind UNCTAD’s Numbers
Trade war tariffs are based on the “optimum tariff” theory. Standard trade theory indicates that, by unilaterally introducing tariffs, a large country limits its imports from the rest of the world. It also reduces the price of its imports relative to its exports, thereby benefiting from an improvement in its terms of trade.
These unilateral tariffs can be calculated by estimating the leverage each country has on international markets. That leverage depends on whether its trade policies are able to influence international prices (its “market power” in economic jargon).
The tariffs in the graph assume that all countries will engage in a trade war and set tariffs to their optimal mercantilist levels.
This would include also nullifying any bilateral concessions and preferential conditions for specific categories of countries (e.g. least developed countries).