Dollar invoicing and supply networks amplify Chinese tariff losses
A 10 percentage point reciprocal US-China tariff war concentrates output losses in China while raising consumer prices in the United States, according to a Banco de España study. The paper shows that dollar invoicing and domestic production networks amplify the downturn in the targeted economy.
Asymmetric burdens across the Pacific
Under a reciprocal 10 percentage point tariff increase across 20 tradeable manufacturing sectors, the country imposing the tariff absorbs the immediate price shock while the targeted economy suffers the main output contraction.
Following a US tariff on Chinese goods, US consumer price inflation increases by 0.13 percentage points on impact, while Chinese output falls by 0.24 percent compared to a 0.04 percent decline in US GDP.
US household consumption falls six times more than domestic output on impact because tariff-inclusive import prices rise immediately.
This consumption decline is cushioned by lump-sum tariff revenue rebates to US households amounting to 0.2 to 0.3 percent of GDP.
Dominant currencies and domestic networks
Domestic input linkages amplify the Chinese contraction as export losses cascade to upstream suppliers.
Furthermore, dominant currency pricing deepens China's three-year average output loss by approximately 30 percent relative to producer-currency pricing, because dollar-denominated export prices prevent renminbi depreciation from boosting competitiveness.
For the euro area, aggregate output remains flat because gross trade diversion gains toward the United States are canceled out by reduced Chinese demand.
The illusion of simple bilateralism
Evaluating trade conflicts solely through bilateral deficits yields flawed policy conclusions.
Tariffs punish domestic consumers with higher prices while cross-sector input costs erase protected industry gains.
Networked supply chains and dollar pricing leave no real shelter from tariff shocks.