Who will win the trade war between the United States and China?
Who will win the trade war between the United States and China?

Who will win the trade war between the United States and China?

The trade war between the US and China started in 2018 and is never officially ended. So which side has “won” it?

Recent research provides a clear answer: neither. U.S. tariffs on Chinese goods led to higher U.S. import prices in the affected product categories, and China’s retaliatory tariffs on U.S. goods ended up hurting Chinese importers. Bilateral trade between the two countries has stalled. And because the United States and China are the world’s two largest economies, many see this development as a warning of the end of globalization.

Yet the “deglobalization” argument ignores the many “urban” countries that were not direct targets of the United States or China. In a new paper examining the effects of the trade war on these countries, my co-authors and I come to an unexpected conclusion: Many, but not all, of these countries present have benefited from the trade war in terms of higher exports.

Admittedly, exports from third countries (Mexico, Vietnam, Malaysia, etc.) would be expected to replace Chinese exports to the United States. But the surprising thing is that these countries increased their exports not only to the United States but also to the rest of the world. In fact, global trade in the products affected by the trade war appears to have increased by 3% relative to global trade in non-tariff-targeted products. This means that the trade war not only led to the redistribution of exports from third countries to the United States (or China); it also resulted in the creation of net trade.

Given that trade wars are generally not associated with this outcome, what is the reason for it? One potential explanation is that some countries present saw the trade war as an opportunity to increase their presence in world markets. By investing in additional trading capacity or mobilizing existing spare capacity, they could increase their exports without increasing their prices.

Another explanation is that as spectator countries began exporting more to the United States or China, their unit costs of production declined because economies of scale allowed them to offer more at lower prices. Consistent with these explanations, our paper finds that the countries with the largest increases in global exports are those where export prices are declining.

While the net effect of the trade war on the world economy was an increase in trade, there was enormous variation across countries. Some countries increased their exports significantly; some increased their exports to the United States at the expense of their exports elsewhere (the redistributed trade); and some countries simply lost exports by selling less to the United States and to the rest of the world. What are the reasons for these differences, and what could countries have done to secure greater gains from the trade war?

Again, the answers are somewhat surprising. One might have guessed that the most important factor explaining countries’ different experiences would be patterns of specialization before the trade war. Countries like Malaysia and Vietnam, for example, were lucky enough to produce a heavily impacted product category such as machinery. Yet patterns of specialization seem to have meant little, judging by the major export winners of the trade war: South Africa, Turkey, Egypt, Romania, Mexico, Singapore, the Netherlands, Belgium, Hungary, Poland, Slovakia, and the Czech Republic.

What mattered instead were two key country characteristics: participation in “deep” trade agreements (defined as regimes that cover not only tariffs but also other border protection measures) and accumulated foreign direct investment. Countries that had a high already existing degree of international trade integration benefited most. Trade agreements tend to reduce the fixed costs of expanding in foreign markets, and existing arrangements may have partially offset the uncertainty generated by the trade war. Similarly, higher FDI is a reliable proxy for major social, political and economic ties to foreign markets.

Supply chain effects may also have played an important role. In a foresighted political briefing based on private conversations with executives of large multinational corporations, analysts at the Peterson Institute for International Economics in 2016 predicted that U.S. tariffs would “set in motion a series of production shifts.”

If a company decided to move the production of a product targeted at Chinese customs duties to a third country, this would necessitate a redeployment of other activities in the third country, which in turn affects several other countries. The exact pattern of these answers would have been difficult to predict given the complexity of modern supply chains. But a country’s degree of international integration seems to have been a crucial factor in a company’s relocation decisions.

To return to our introductory question, the great winner of the trade war seems to be spectator countries with deep international ties. From the US perspective, the trade war did not lead to the announced recovery of economic activity, at least in the short to medium term. Instead, Chinese imports to the United States were simply replaced by imports from other countries.

From the perspective of spectator countries, the trade war ironically showed the importance of trade integration, especially deep trade agreements and foreign direct investment. Fortunately, the Sino-American trade war does not mean the end of globalization. Rather, it may mark the beginning of a new world trade system that no longer has the United States or China at its center.

Pinelopi Koujianou Goldberg, a former chief economist at the World Bank Group and editor-in-chief of the American Economic Review, is a professor of economics at Yale University. © Project Syndicate, 2022

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