The US-China trade war: Macro effects of tariff shocks in a two-country DSGE model

Liao, Zikang 2025. The US-China trade war: Macro effects of tariff shocks in a two-country DSGE model. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis analyzes the macroeconomic effects of the U.S.–China trade war—a major bilateral conflict with global implications—focusing on why both countries impose tariffs for perceived economic gains. Therefore, we first address whether high tariffs imposed by the U.S. and China—citing large trade deficits as highlighted by the Trump administration—will improve or worsen those deficits and what macroeconomic consequences will follow. As a second question, we examine whether broadening the motivation beyond the trade deficit—to include domestic jobs, non-economic factors, foreign tariffs, subsidies, and their combinations—better fits the data under indirect inference and reveals which scenario minimizes welfare loss. Finally, we explore whether adding institutional structure—using sovereign ESG as a proxy—and tracing the link from tariffs to ESG to other macro variables improves model efficiency under indirect inference, and whether the best-matched model (via IIW) confirms or statistically rejects certain regression relationships as spurious. This study makes three main contributions to the literature. First, using a two-country DSGE model, we show that higher tariffs—often intended to reduce trade deficits—fail to achieve this goal. Second, applying indirect inference, we demonstrate that although higher tariffs justified by large trade deficits align most closely with the data, the lowest welfare loss arises under zero-tariff scenarios. Third, by incorporating sovereign ESG as a proxy for institutional quality, we improve the model’s empirical fit, highlighting the critical role of institutional factors in macroeconomic responses to trade policy.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Uncontrolled Keywords:	U.S.–China trade war, DSGE model, indirect inference, welfare analysis, sovereign ESG
Date of First Compliant Deposit:	10 December 2025
Last Modified:	10 Dec 2025 16:44
URI:	https://orca.cardiff.ac.uk/id/eprint/183098

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