A Trade War With Two Losers on Growth, but One Winner on Welfare

The economic consequences of the US-China tariff war extend far beyond disrupted exports and declining bilateral trade. As the world's two major economies impose barriers on each other's goods, changes in international prices, production costs, and sourcing decisions are reshaping energy markets. The resulting economic losses and gains are distributed unevenly, creating a striking divide between national output, economic welfare, and energy-trade performance.

A study titled Energy Trade and Welfare Effects of the 2025 US–China Tariff Shocks: A Recursively Updated GTAP Analysis, published in the journal Energies by researchers Tingting Wang and Yuqing Jiang of China University of Petroleum–Beijing, examines these complex relationships. Using global economic simulations, the researchers assess how the 2025 tariff escalation affected economic welfare, real GDP, and international trade in coal, crude oil, natural gas, and electricity.

Their findings challenge straightforward interpretations of trade-war winners and losers. Under the highest simulated tariff shock of 145%, China's economic welfare falls by $203.59 billion, while the United States records a $41.43 billion welfare gain. Yet both economies experience declining real GDP, revealing how a country can gain purchasing power through favorable international trading prices even while its domestic production weakens.

Tariff Escalation Reveals a Deep Divide Between Economic Growth and Welfare

The 2025 trade confrontation developed through successive tariff increases, culminating in cumulative additional US duties of 145% on many Chinese goods. China introduced retaliatory measures, while subsequent negotiations established a lower-tariff arrangement. These developments created the basis for examining how changes in trade restrictions affect interconnected economies.

The researchers employ a Global Trade Analysis Project model using a database covering 160 countries or regions and 65 sectors, subsequently aggregated for analysis. They update the underlying economic benchmark from 2017 to 2023 and simulate five bilateral tariff scenarios ranging from 20% to 145%, alongside a lower 30% setting. Additional tests examine how different assumptions about switching between suppliers influence the results.

Under the peak tariff scenario, China's real GDP declines by 0.59%, compared with a 0.19% contraction in the United States. The welfare results, however, move in opposite directions. China experiences a $203.59 billion loss, while the United States gains $41.43 billion, even though neither economy escapes the negative production effects of higher trade barriers.

The explanation lies in the distinction between productive efficiency and the terms of trade, which measure the relationship between export and import prices. China's welfare losses include $104.32 billion from reduced resource-allocation efficiency and $97.93 billion from deteriorating terms of trade. A further $1.33 billion loss arises from investment–savings effects, reinforcing the overall deterioration.

The United States experiences a different combination of pressures. Its $40.77 billion efficiency loss is outweighed by a $68.94 billion terms-of-trade gain and a $13.27 billion investment–savings gain. The simulated welfare advantage therefore comes primarily from favorable changes in international relative prices rather than stronger domestic production or greater economic efficiency.

These results require careful interpretation. The researchers distinguish their economy-wide welfare estimates from direct measurements of who pays tariffs at the border. A favorable terms-of-trade movement does not demonstrate that foreign exporters absorb the tariff burden, nor does it eliminate the efficiency losses associated with trade restrictions.

Energy Markets Defy Expectations as Imports Rise Despite Higher Trade Barriers

The energy-sector findings reveal another counterintuitive outcome: escalating bilateral tariffs can increase overall energy imports rather than uniformly suppress them. Higher trade barriers alter relative prices and encourage substitution among domestic production, imports from the bilateral partner, and supplies originating elsewhere.

Under the 145% scenario, China's natural-gas production contracts by 11.21%, while coal, crude-oil, and electricity production increase by 0.79%, 0.40%, and 0.79%, respectively. The United States experiences a 17.32% increase in electricity output and a 2.14% rise in coal production, alongside smaller contractions in crude-oil and natural-gas output.

Export patterns are equally uneven. China's coal exports rise by 17.94% and electricity exports by 23.29%, while natural-gas exports fall by 33.14%. US coal, crude-oil, and natural-gas exports decline, whereas electricity exports increase by 224.26%. Such substantial percentage movements demonstrate the sensitivity of particular trade flows to changing market conditions.

Nevertheless, the researchers warn against interpreting unusually large percentage increases as equally large changes in absolute trade volumes. The scale of an export response depends on its initial value, meaning a dramatic percentage rise from a relatively small trading base may have a limited aggregate impact.

Import responses offer a more consistent pattern. China records increases of 9.23% in coal imports, 0.42% in crude oil, 1.12% in natural gas, and 97.62% in electricity. Corresponding US increases reach 108.32% for coal, 7.55% for crude oil, 14.25% for natural gas, and 23.10% for electricity.

Importantly, all eight import responses remain positive when the researchers vary assumptions about how readily buyers switch between suppliers. Their magnitudes, however, change substantially. China's electricity-import increase ranges from 19.67% to 235.92%, while the US coal-import response ranges from 5.10% to 397.68%.

The contrast between stable directional findings and highly variable magnitudes reinforces the need for commodity-specific energy-security assessments. The simulations show that trade restrictions can redirect sourcing relationships, making supplier diversification and exposure to external markets important considerations for governments and energy companies.

Beyond Washington and Beijing, Trade Diversion Creates Uneven Global Winners and Losers

The consequences of the tariff confrontation spread across third-party economies, even though the simulations impose direct tariff shocks only on bilateral US–China trade. Changes in demand, relative prices, and supplier substitution generate adjustments throughout international energy markets.

Under the peak scenario, Australia records an $11.39 billion welfare gain, followed by Russia at $8.11 billion and ASEAN-10 at $7.62 billion. Other North America gains $6.95 billion, while OPEC experiences a $4.26 billion welfare improvement despite a small decline in real GDP.

Not every economy benefits. The combined Japan–South Korea region experiences a $10.06 billion welfare loss, while the European Union loses $4.20 billion. These results demonstrate that third-party exposure depends on more than geographical distance from the countries imposing tariffs.

Energy-trade patterns reveal additional differences. Coal and crude-oil exports increase across all eight third-party groups examined, while natural-gas exports rise in seven. Electricity exports, however, decline in most groups, including reductions of 22.63% in Australia and 22.32% in Japan and South Korea.

Import adjustments follow another pattern. Electricity imports increase across all eight groups, while natural-gas imports decline throughout. Coal imports rise in six groups, whereas crude-oil import responses remain relatively small and mixed. The resulting reallocation produces opportunities for some suppliers while exposing others to unfavorable market shifts.

For ASEAN economies and other countries represented in the regional groupings, the findings suggest that changes in bilateral trade can create selective export opportunities. However, the study cautions that increasing trade volumes do not necessarily translate into welfare gains, and its regional aggregation does not establish outcomes for every individual economy.

The researchers consequently advise evaluating market opportunities at the product level rather than assuming that trade diversion provides a general economic benefit. Long-term investment in energy production or transport capacity should not depend solely on simulated demand shifts arising from one tariff scenario.

Tariff Rollbacks Improve Economic Output but Cannot Deliver Equal Welfare Gains

The study's sequential simulations provide a revealing perspective on tariff de-escalation. Unlike the independent scenarios, which compare each tariff level against the same 2023 benchmark, the sequential experiment assesses economic changes relative to the equilibrium established by the preceding tariff adjustment.

When the modeled bilateral tariff shock falls from 145% to 30%, China's real GDP increases by 0.13% and US real GDP by 0.10% relative to the peak-tariff equilibrium. Economic welfare, however, moves in opposite directions: China gains $100.62 billion while the United States loses $37.53 billion.

The reversal underscores the importance of distinguishing improvements in economic output from changes in national welfare. Lower tariffs ease production losses in both economies, but the redistribution of trading-price advantages prevents the benefits from appearing symmetrically in the welfare estimates.

The researchers emphasize that these sequential outcomes are comparisons between modeled equilibria rather than a reconstruction of actual economic recovery. Because the peak tariffs remained in place only briefly, the simulations cannot establish how quickly businesses, consumers, and energy suppliers adjusted in practice.

Modeling assumptions also impose important limitations. The simulations apply uniform and symmetric bilateral tariff shocks, whereas actual tariff measures differed across products. The framework assumes full employment within simulation periods, while historical substitution estimates may not fully represent behavior under exceptionally high tariffs.

Detailed tariff schedules, emissions, electricity-generation technologies, adjustment costs, and investment responses in future studies could provide a broader understanding of longer-term energy consequences. Such extensions would help clarify how tariff instability interacts with energy security and the transition toward more sustainable energy systems.