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Trade, USA and the Rise of China: Pains and Gains

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Using the model presented in Chap. 6, we simulate China’s growth and show that it generates a welfare gain for the whole world. The gain is larger for countries close to China and for commodity exporters that gain from improved terms of trade. There is a reduction in manufacturing production in other countries, and for the USA and Western Europe, these pains are large compared to the gains. Simulating trade policy options for the USA, the analysis suggests that trade integration, also with Asia, is good for welfare as well as US manufacturing. Trade liberalisation has to be reciprocal; otherwise it hurts manufacturing. Hence President Trump is right about reciprocity, but wrong about trade agreements: Free Trade Agreements (FTAs) are part of the solution and not the problem. Since China has grown in size and productivity, its share of the US trade deficit has increased. But the US trade deficit is a US problem and not a China problem; its trend over time looks about the same with or without China.


  • Trade Integration
  • Transatlantic Trade And Investment Partnership (TTIP)
  • North American Free Trade Agreement (NAFTA)
  • welfareWelfare
  • Trade deficitTrade Deficit

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  • DOI: 10.1007/978-3-319-92834-0_7
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  1. 1.

    Data source: United Nations Commodity Trade Statistics Database (COMTRADE). Observe that import data include cost, insurance and freight, while export data do not. When trade is balanced, the net trade ratio will therefore be slightly negative. This should be observed but is not a problem here since we focus on the trend over time and the comparison of the two curves.

  2. 2.

    We also run simulations of unilateral US liberalisation in NAFTA. Also in this case there was a welfare gain but contraction in US manufacturing. For brevity, these results are not reported here.


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Melchior, A. (2018). Trade, USA and the Rise of China: Pains and Gains. In: Free Trade Agreements and Globalisation. Palgrave Macmillan, Cham.

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