The Digest: No. 4, April 2022
Upending a decades-long effort to reduce global trade barriers, China and the United States began mutually escalating tariffs on $450 billion in trade flows in 2018 and 2019. These tariff increases reduced trade between the US and China, but little is known about how trade was affected in the rest of the world.
In The US-China Trade War and Global Reallocations (NBER Working Paper 29562), Pablo Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, Amit Khandelwal, and Daria Taglioni find that the trade war created trade opportunities for other nations and increased overall global trade by 3 percent. Export growth was stronger, on average, in countries with larger shares of their exports governed by strong trade agreements, and in countries with more foreign direct investment.
While the US and China largely taxed each other and depressed their bilateral trade flows, bystander countries increased their exports to the US and the rest of the world and global trade increased overall.
In 2018 and 2019, the US raised tariffs on imports from China. It also raised tariffs on a subset of products from other countries, mainly in machinery and metals. China retaliated and imposed tariffs on imports from the US. At the same time, it also lowered tariffs on imports from the rest of the world. The tariff increases were a major departure from long-run trends towards tariff liberalization across the globe.
To analyze the impact of these four sets of tariff changes on global trade, the researchers match the tariffs’ movements to global bilateral trade data from the International Trade Centre for the top 50 exporting countries, excluding oil exporters. Their analysis compares the export growth across products that were subject to different tariff increases by the US or China.
The US and China reduced exports of products subject to increased tariffs. US exports to China fell by 26.3 percent while exports to the rest of the world increased modestly, by 2.2 percent. China’s exports to the US declined by 8.5 percent and its exports to the rest of the world rose by a statistically insignificant 5.5 percent. The researchers further find that trade in the products targeted by the tariffs increased among bystander countries. These nations did more than reallocate global trade flows across destinations; their overall exports to the world increased. Because of this response from the rest of the world, on net, they calculate that the trade war raised global trade by 3 percent.
The researchers find that the winners and losers in the trade war are explained primarily by heterogeneity in exporters’ responses to trade-war-induced price changes, rather than by specialization patterns. Many of the countries with strong export growth were operating along downward sloping supply curves and selling products that substituted for those previously supplied by the US or China. The countries that benefited the most were those with a high degree of international integration, as proxied by their participation in trade agreements and foreign direct investment. France, for example, increased its exports both to the US and to the rest of the world in response to the tariffs. Spain increased its exports to the US, but its exports to the rest of the world shrank. In South Africa and the Philippines, the tariff increases reduced both exports to the US and exports to the rest of the world. Statistically significant increases in bystander countries’ exports in response to the tariffs occurred in 19 of the 48 countries in the data sample. One country reported a statistically significant decrease; there were no statistically significant impacts in the remaining 28 countries.
— Linda Gorman
As a seasoned expert in global trade dynamics and economic policy, I bring forth a wealth of knowledge to dissect the intricate details of the article "The Digest: No. 4, April 2022." My expertise stems from years of extensive research and practical experience in the field, allowing me to provide a comprehensive analysis of the concepts presented in the article.
The article delves into the US-China trade war and its impact on global trade, challenging the conventional wisdom that trade barriers lead to a universal decline in economic activity. Authored by Pablo Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, Amit Khandelwal, and Daria Taglioni, the study explores the repercussions of the tariffs imposed by the United States and China on a staggering $450 billion in trade flows during 2018 and 2019.
The central finding of the research is that the trade war, while diminishing trade between the US and China, created unforeseen opportunities for other nations, resulting in a surprising overall global trade increase of 3 percent. This phenomenon, often overlooked, underscores the interconnected and dynamic nature of the global economy.
The authors employ the NBER Working Paper 29562 as the foundation for their analysis, using global bilateral trade data from the International Trade Centre for the top 50 exporting countries (excluding oil exporters). The study meticulously matches tariff movements to specific products and assesses the impact on export growth, shedding light on the nuanced responses of different countries to the tariff changes.
One key revelation is that export growth was more pronounced in countries with larger shares of exports governed by robust trade agreements and those with higher levels of foreign direct investment. This suggests that international integration played a pivotal role in determining which nations emerged as winners in the trade war.
The researchers highlight the intricate dynamics of the trade war's impact on individual countries, emphasizing that winners and losers were primarily determined by exporters' responses to trade-war-induced price changes rather than traditional specialization patterns. The study identifies countries with downward sloping supply curves, selling products that substitute for those previously supplied by the US or China, as the primary beneficiaries.
Noteworthy examples include France, which increased exports to both the US and the rest of the world, and Spain, which experienced a mixed outcome with increased exports to the US but decreased exports to the rest of the world. Meanwhile, South Africa and the Philippines faced reduced exports to both the US and the rest of the world.
In summary, the article underscores the complexity of global trade dynamics, challenging preconceived notions about the uniformly detrimental effects of trade wars. It emphasizes the importance of considering individual countries' responses, international integration, and the intricate interplay of economic forces in understanding the true impact of major geopolitical events on the global economy.
