Bridging Macro and Micro Analysis: Trade and Welfare Effects of ChinaUS Trade Frictions

ABSTRACT We quantify the trade and welfare effects of China‐US trade frictions, Chinese response strategies and potential trade liberalisation using a multi‐country, multi‐firm heterogeneity model distinguishing between intermediate and final goods, highlighting tariff spillovers and internalisation effects arising from input–output linkages. Our framework disaggregates aggregate welfare and trade effects into China's micro‐level trade benefits, bridging the gap between macroeconomic shocks and firm‐level trade performance. We find that trade protectionism leads to welfare deterioration for most economies, with tariffs on intermediate goods causing more pronounced losses due to supply chain effects. China‐US frictions significantly reduce China's trade benefits, and alliance‐based containment strategies inflict greater welfare losses than unilateral US actions. Retaliatory tariffs prove ineffective for China, while joining trade agreements like RCEP can mitigate but not fully offset losses. Firm level analysis suggests that restricting exports by the top 10% of leading firms would reduce exports to the destination market by nearly 80%. This research provides valuable insights into trade friction dynamics and policy implications, offering a robust framework for estimating various trade scenarios.