A trade war between the U.S. and China is actually great for the European economy, as long as Europe stays out of it.
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.
The Third-Country Effects of Trade Wars
SSRN · 6508405
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