The Effects of the Trade War on Inflation

This is a preview from the National Institute Economic Review, February 2020, no 251.

In the past two months some of the uncertainties around the trade war between the US and China have settled. The negotiations between the US and China have culminated in the Phase One agreement, which was signed on 15 January. After this agreement, tariffs on goods traded between the two countries are substantially higher than before the trade war started. Estimates from the Peterson Institute are that the average trade-weighted US tariff rate has risen from 3.1 per cent two years ago to 19.3 per cent and the average tariff by China on US goods has mirrored this, by increasing from 8 per cent to 20.9 per cent (Bown and Kolb, 2019).

In previous Reviews, the issue about the possible effects of the trade war on output growth has been examined using simulations on our model, NiGEM (Liadze and Haache, 2017; Hantzsche and Liadze, 2018; Liadze, 2018a, b). Following recent research by Amiti et al. (2020), this note examines the possible effects of the increase in tariffs on consumer prices. A tariff increase acts as a negative supply shock, raising prices of inputs to production and increasing output prices, leading to lower output.

In this box, prepared by Barry Naisbitt and Kemar Whyte, we look at the effects of the trade war on inflation.