A trade war between the U.S. and China is actually great for the European economy, as long as Europe stays out of it.
April 2, 2026
Original Paper
The Third-Country Effects of Trade Wars
SSRN · 6508405
The Takeaway
We usually assume global trade conflicts hurt everyone, but this model shows that 'third-party' countries see a temporary welfare boost from trade diversion. However, this gain immediately flips into a massive loss the moment the tariffs are expanded to include them.
From the abstract
We study how trade wars propagate to countries that are not directly targeted. We develop a three-country New Keynesian model with trade in final and intermediate goods, incomplete asset markets, and asymmetric monetary regimes, and quantify the spillovers of the 2025 U.S.-China tariff escalation to the euro area. A bilateral U.S.-China trade war generates large and asymmetric welfare losses for the U.S. and China, while the euro area benefits temporarily from trade diversion. Once tariffs exten