Does the US–China trade war increase poverty in a developing country? A dynamic general equilibrium analysis for Indonesia

Abstract In contrast to previous studies that mostly focused on the winners and losers of the US–China trade war, this study investigates the poverty and income distribution impact of the trade dispute in a developing country, using Indonesia as a case study. Employing a dynamic, computable general equilibrium model that is multi-region and multi-household, this study found that the trade war increases households’ real income and reduces poverty in Indonesia. The impact of the trade war, which is channeled into the Indonesian economy via trade diversion, improves the country’s terms of trade and eventually increases the returns of primary factors owned by households. However, Indonesia’s income inequality might increase as the rise in real income of upper-income households exceeds the rise in real income of lower-income households. The policy measures introduced by Indonesia to take advantage of the trade war might lower poverty incidence further and alter the impact of negative income distribution from the trade war.