(Photo: AP)

Washington (People's Daily) -- US-China trade tensions have negatively affected consumers as well as many producers in both countries, according to an International Monetary Fund report released Thursday.

The tariffs have reduced trade between the US and China, but the bilateral trade deficit remains broadly unchanged. While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains and jeopardize the projected recovery in global growth in 2019.

The raising of US tariffs to 25 percent on $200 billion of annual Chinese imports on May 10, together with the announced Chinese retaliation, marks the latest escalation in US-China trade tensions.

IMF analysis of the negative impact on consumers and producers shows consumers in the US and China are the unequivocal losers from trade tensions. IMF researchers using price data from the Bureau of Labor Statistics on imports from China found that tariff revenue collected has been borne almost entirely by US importers. There was almost no change in the (ex-tariff) border prices of imports from China, and a sharp jump in the post-tariff import prices matching the magnitude of the tariff.

Some of these tariffs have been passed on to US consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins. A further increase in tariffs will likely be similarly passed on to consumers.

US and Chinese producers of goods affected by tariffs, as well as producers that use those goods as intermediate inputs, are potential losers. Trade diversion is one channel through which producers are affected. Aggregated bilateral US data does suggest that trade diversion has occurred, as the decline in imports from China appears to have been offset by an increase in imports from other countries. The other channel by which producers could be affected is through market segmentation in the price of traded goods. This was most clearly observed in the case of soybeans, where US exports to China fell dramatically in 2018 after China imposed tariffs.

The ratcheting up of bilateral tariffs between the US and China has had limited effect on their bilateral trade balance. In fact, in 2018, the trade deficit increased for the US as imports from China rose, which partly reflects the front-loading. As of March 2019, a small decline can be observed, but US exports to China are also falling.

At the global level, the additional impact of the recently announced and envisaged new US-China tariffs, expected to extend to all trade between those countries, will subtract about 0.3 percent of global GDP in the short term, with half stemming from business and market confidence effects. Moreover, failure to resolve trade differences and further escalation in other areas, such as the auto industry, which would cover several countries, could further dent business and financial market sentiment, negatively impact emerging market bond spreads and currencies, and slow investment and trade.

And higher trade barriers would disrupt global supply chains and slow the spread of new technologies, ultimately lowering global productivity and welfare. More import restrictions would also make tradable consumer goods less affordable, harming low-income households disproportionately.

This type of scenario is among the reasons why we referred to 2019 as a delicate year for the global economy.