College of Business Education

International Trade and Agreement

Mini-Research Project
AY 2023-2024

The Effects of US-China Trade War

on International Trade
A Research on Issues Affecting International Trade

Submitted by:

Mariesz Pleyto
Maria Lea Collingwood
Angelica Haloc

Submitted to:

Iris Cristine F. Gonzales

Instructor

Dec 15, 2023

 Table of Contents

Introduction
Abstract……………………………………………………………………………..…1
Statement of the Problem……………………………………………………………...2
Significance of the Study…………………………………………………………..….3

Review of Related Literature

Compilation of Related Literature……………………………………………….…...4-125

Conclusion
Summary of Findings (based on Related Literature)………………..……..……..…..126
Recommendations………………………………………………………………….….127
Reflection and Realizations………………………………………………….………...128
 INTRODUCTION
Abstract
An economic conflict between China and the United States has been ongoing since January
2018, when U.S. President Donald Trump began settings tariffs and other trades barriers on China
with the goal of forcing it to make changes to what the U.S. says are longstanding unfair trade
practices and intellectual property theft. This paper aims to analyze the effect of US-China trade
war on global trade, world economy and how does the US-China trade war affect consumers.
This paper provides an economic analysis of the trade conflict between the US and China,
providing an overview of the tariff increases, a discussion of the background of the trade conflict,
and an analysis of the economic effects of the trade conflict, based both on empirics (ex post
analysis) and on simulations (ex ante analysis). Also, there are countries who benefits because of
this trade war of US and China like Vietnam, Thailand, Korea and Mexico — they are able to
boost exports significantly, in part by providing substitutes for goods subject to the U.S.-China
tariffs. Others, such as Ukraine and Colombia, saw a decline, largely because their exports
complemented goods hit by the tariffs.

1
 Statement of the Problem

The trade war caused economic pain on both sides and led to diversion of trade flows away from
both China and the United States. As described by Heather Long at the Washington Post, “U.S.
economic growth slowed, business investment froze, and companies didn’t hire as many people.
Across the nation, a lot of farmers went bankrupt, and the manufacturing and freight
transportation sectors have hit lows not seen since the last recession. Trump’s actions amounted
to one of the largest tax increases in years.
Therefore, this paper aims to analyze the effect of US-China trade war on global trade, world
economy and how does the US-China trade war affect consumers. The main research question is:
How has the US-CHINA trade war affected global trade in terms of increasing tariffs and trade
flows. The objective of this paper are;

 To measure the impact of war on global trade.

 To discuss the effect of trade war to the consumers
 To analyze the causes of trade war.

By addressing this research question and objectives, this paper will fill a gap in the literature on
the economic consequences of the Us-China trade war, and provide valuable insights for policy
makers, traders, and consumers.

2
 Significance of the Study

The trade tensions between the United States and China have been ongoing since and has
affected the international trade and global economic relations. The conflict has disrupted
international trade flows, contributed to a global economic slowdown and supply chain
disruptions affecting consumers, producers, and employment across various sectors. The US-
China trade war has also affected the stock market revealing increased market volatility and trade
volumes more susceptible to economic uncertainties. Yet the study’s finding may be constrained
by the availability of data resources for ongoing research and analysis to comprehensively
understand multifaceted impacts of the US-China trade war and its broader implications for
international trade.
Therefore, this paper aims to analyze the effects of the Us-China trade war on
international trade using data from various sources. The significance of this paper is as follows:

 This paper will contribute to the existing literature on the impacts of the US-China trade war
by providing empirical evidence on the economic impacts of the trade war, which can inform
policymakers and researchers in their decision-making processes
.
 This paper will benefit the academic community by providing insights into the causes,
effects, and potential solutions of trade war, shedding light on the consequences for the
betterment of international trade and the global economy.

 This paper will benefit the society by raising awareness among consumers and producers
about the potential impacts of trade war on the prices of imported goods and products.

 This paper provides practical recommendations for addressing the economic consequences
of trade war. And contributes to the efforts aimed at minimizing the negative impact of the
trade war on global economic stability and fostering more constructive trade relationships
between nations.

 This paper will inspire future research by identifying gaps and limitations in the current
knowledge and practice, and by proposing new hypotheses and questions for further
investigation.

3
REVIEW OF RELATED LITERATURE
Compilation of Related Literature

4
Sino-American Clash of Hegemony: An Analysis of US-China Trade War

Kammogne Josiane Sider

Department of International Relation, School of Politics and International

Studies,

China Central Normal University (CCNU), Wuhan, China.

January 2020

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 Abstract

In economic history, 2018 will be remembered as the year that the US

started a trade war with China. The longtime leading hegemony is now

embarking with the rising hegemony in one of the largest trade wars in economic

history to date. US-China economic ties have expanded substantially since China

began reforming its economy and liberalizing its trade regime in the late 1970s.

According to the INVESTOPEDIA DICTIONARY, a trade war is a side effect of

protectionism that occurs when one country (Country A) raises tariffs on another

country’s (Country B) imports in retaliation for Country B raising tariffs on

Country A’s imports. As it escalates, a trade war reduces international trade.

China and the United States are engaged in a trade war as each country

continues to dispute tariffs placed on goods traded between them. US President

Donald Trump had promised in his campaign to fix China’s longtime abuse of

the broken international system and unfair practices. The economic disputes

occurred before China’s entry to the World Trade Organization but former

Presidents George H. W. Bush, Bill Clinton, George W. Bush, and Barack Obama

all failed to solve the problems. In April 2018, the United States filed a request for

consultation to the World Trade Organization in regard to concerns that China

was violating intellectual property rights. In adding various tariffs, the US

administration is relying partly on Section 301 of the Trade Act of 1974 to prevent

what it calls unfair trade practices and theft of intellectual property . This gives

the president the authority to unilaterally impose fines or other penalties on a

trading partner if it is deemed to be unfairly harming US business interests,

especially if it violated international trade agreements. In August 2017, the US

6
opened a formal investigation into attacks on the intellectual property of the US

and its allies, which cost the US alone an estimated $225 - 600 billion a year in

losses. The result is that the US believes Chinese laws undermine intellectual

property rights by forcing foreign companies to engage in joint ventures with

Chinese companies, which then gives the Chinese companies access and

permission to use, improve, copy or steal their technologies. The US also raises

concerns that China fails to recognize legitimate patents and copyrights, and

discriminates against foreign imported technology, and that China has instituted

numerous non-tariff barriers which have insulated sectors of the Chinese

economy from international competition. Thus, the trade war is seen as largely

focused on intellectual property in China, especially regarding technology. The

trade war began in earnest in July with the US levying its first round of punitive

tariffs, triggered by an investigation under Section 301 of the Trade Act into

Chinese trade and intellectual property practices

1. Introduction

Economic and trade reforms begun in 1979 have helped transform China

into one of the world’s biggest and fastest-growing economies (Grossman &

Helpman, 1991). China’s economic growth and trade liberalization, including

comprehensive trade commitments made upon its entry to the World Trade

Organization (WTO) in 2001, have led to a sharp expansion in US-China

commercial ties. Despite growing commercial ties, the bilateral economic

relationship has become increasingly complex and often fraught with tension.

From the US perspective, many trade tensions stem from China’s incomplete

transition to a free market economy. While China has significantly liberalized its

7
economic and trade regimes over the past three decades (Prieger, Bampoky,

Blanco, & Liu, 2016), it continues to maintain (or has recently imposed) a number

of state-directed policies that appear to distort trade and investment flows (Wu,

2014). Major areas of concern expressed by US policymakers and stakeholders

include China’s alleged widespread cyber economic espionage against US firms;

relatively ineffective record of enforcing intellectual property rights (IPR);

discriminatory innovation policies; mixed record on implementing its World

Trade Organization (WTO) obligations; extensive use of industrial policies (such

as subsidies and trade and investment barriers) to promote and protect

industries favored by the government; lack of transparency in trade rules and

regulations; distortion economic policies that have led to overcapacity in several

industries; and its large merchandise trade surplus with the United States; and

interventionist policies to influence the value of its currency. Many US

policymakers argue that such policies adversely impact US economic interests

and have contributed to US job losses in some sectors.

China’s economic and trade conditions, policies, and acts have a

significant impact on the US economy as a whole as well as specific US sectors

and thus are of concern to Congress (Bloom, Draca, & Van Reenen, 2016). By

comparing the ongoing trade war with similar trade conflicts in history, we

reveal some major causes, with varying degrees of importance, from both

economic and political perspectives. US-China trade war can principally be

attributed to trade imbalances, and rivalry over global economic dominance

(Terence, 2019). To another extent, US’ assumptions made on China theft of U.S

intellectual property and China’s responses through the imposition of 25% tariffs

8
on $16 billion of imports from the US have been the main causes of trade war

between both superpowers. This paper provides an overview of US-China

commercial ties, identifies major causes, effects or issues of contention, and

provides some solutions on how to mitigate further escalation of such a “war”

between both economic giants. In other words, our analysis will focus on the

trade war between both countries from ideological, historical and economic

perspectives, and by the way, understanding its causes, effects and providing

some solutions to such a “war”.

2. Overview, Causes of US-China Trade War and Reasons for the US to

Implement Tariffs Sanctions

Since the establishment of diplomatic relations between China and the

United States, the economy between the two countries has been developing

rapidly, both countries being characterized as good partners in terms of imports

and exports. US has over a decade experienced trade war between other

European countries, but never reached that with China. From an ideological

perspective, US and China are viewing the world differently, embracing different

cultures and therefore, are sharing different values. While the US is most valuing

the Western Ideology, China is still enshrines in its own (Marxism-Communism-

Nationalism). It is felt that for a long time the US government has brazenly

preached unilateralism, protectionism and economic hegemony, made false

accusations against many countries and regions, particularly China, intimidated

other countries through economic measures such as imposing tariffs, and

attempted to impose its own interests on China through extreme pressure (Bown,

Jung, & Lu, 2018).

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 Taking from an ideological perspective, there is a kind of competition that

could be observed. The ruling power, which is the US, is seeing China—the

rising power as a real potential challenger (Autor, 2018).

2.1. Chronology of US-China Trade Dispute from 2018 to 2019

Here is a chronology of the major events of the trade conflict, and what led up to

it since the beginning of January 2018 and the year 2019 (China Briefing), and

· October 18, 2019—US tariff exclusion process for US$300 billions of Chinese

imports;

· October 11, 2019—US announces “Phase 1” deal, delays tariff increase for

Chinese goods;

· September 20, 2019—US releases new tariff exemption lists, which exempt over

400 Chinese goods from tariffs;

· September 19-20, 2019—US-China mid-level trade talks in Washington;

· September 13, 2019—China exempts various agricultural products from

additional tariffs;

· September 11, 2019—China unveils tariff exemption list for US imports;

· September 5, 2019—China and US agree to 13th round of trade talks;

· September 2, 2019—China lodges WTO tariff case against the US;

· September 1, 2019—Tariffs come in force as scheduled;

· August 26, 2019—Liu calls for calm, Trump says talks will proceed;

· August 25, 2019—Trump, White House make contradictory statements;

· August 23, 2019—China announces US$75 billion in tariffs on US goods;

· Trump threatens tariff increases on Chinese goods;

· August 13, 2019—US and China agree to talk again in two weeks;

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· August 13, 2019—US delays tariffs on certain products and removes items from

the list;

· August 6, 2019—Chinese companies suspend new US agricultural product

purchases;

· August 6, 2019—US declares China is a currency manipulator;

· August 1, 2019—Trump says US will impose 10 percent tariffs on another

US$300 billions of Chinese goods starting September 1;

· July 30-31, 2019—Shanghai trade talks end with little progress being made;

· July 16, 2019—Trump threatens tariffs on US$325 billions of Chinese goods,

new member on China’s negotiating team;

· July 9, 2019—US exempts 110 Chinese products from 25 percent tariffs, issues

licenses to American Huawei suppliers;

· June 29, 2019—Trade talks to restart, ban on Huawei relaxed;

· June 26, 2019—Tentative truce reached days before G20 Summit;

· June 21, 2019—US adds another five Chinese entities to its “entity list”;

· June 19, 2019—US Tariff Exemption Process for Chinese Imports;

· June 18, 2019—Xi and Trump rekindle trade talks ahead of G20 meeting;

· June 2, 2019—China issues white paper on US-China economic relations;

· June 1: China increases tariffs on US$60 billion worth of products;

· May 31: China establishes its very own “unreliable entities” list;

· May 16: US places Huawei on its “entity list”, banning it from purchasing from

US companies;

· May 13: China announces tariff hikes on US products;

· May 10: US increases tariffs from 10 percent to 25 percent;

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· May 5: Trump threatens to raise tariffs on China；

· April 30-May 1: US and China hold trade talks in Beijing；

· April 10: US and China agree to establish trade deal enforcement office;

· April 3-5: US and China hold trade talks in Washington;

· April 1: China bans all types of fentanyl;

· March 31: China extends the suspension of additional tariffs on US autos and

auto parts;

· March 28-29: US and China hold trade talks in Beijing after one month break;

· February 21-24: US and China hold trade talks in Washington; Trump extends

tariff deadline;

· February 11-15: US and China hold trade talks in Beijing;

· February 7: Trump says he will not meet with Xi before trade deal deadline;

· January 30-31: US and China hold 2-day trade talks in Washington D.C;

· January 22: US cancels preparatory talks with China;

· January 7-9, 2019—US and China engage in 3-day trade talks in Beijing;

· July 2018: China retaliated imposing tariffs of US$ 34billion worth of US goods;

· June 2018: US placed tariffs on US imports worth of US$ 34billion;

· June 2018: China responded by imposing tariffs on US exports worth of US$ 3

billion;

· March 2018: US placed tariffs on the imports of steel (25%) and aluminum

(10%);

· January 2018: US placed tariffs on Chinese solar panels and washing machines’

imports.

2.2. Causes of the Tensions and Reasons of US to Impose Tariffs

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 US politicians have long threatened a trade war with America’s largest

trading partner in goods. A trade deficit occurs when exports are less than

imports (Kimberly, 2018). In 2017, the United States exported $130 billion to

China. The three largest export categories are aircraft at $16 billion; soybeans, $12

billion; and automobiles, $11 billion. US imports from China were $506 billion.

Most of it is electronics, clothing, and machinery. But a lot of the imports are

from US manufacturers that send raw materials to China for low-cost assembly.

Once shipped back to the United States, they are considered imports. As a result,

tariffs hurt US corporations as well as foreign ones. China is the world’s No.1

exporter. Its comparative advantage is that it can produce consumer goods for

lower costs than other countries can. China has a lower standard of living, which

allows its companies to pay lower wages. American companies can’t compete

with China’s low costs, so it loses US manufacturing jobs. Americans, of course,

want these goods for the lowest prices. Most are not willing to pay more for

“Made in America.” Trump’s trade war with China is really about blocking, or at

least slowing down, China’s technology upgrade and its expanding global

economic influence. Chinese investment in the tech sector in the US has come

under tougher scrutiny, and American government agencies are put on high

alert against Chinese efforts in industrial espionage. The clause of protecting

national security in the US Trade Act of 1974 is increasingly invoked to impose

new tariffs on Chinese imports and to curtail China’s business mergers and

acquisitions in the US (Lovely & Liang, 2018).

Recently, the United States has increased pressure on China by placing

one of its top technology companies—HUAWEI on a list that some refer to as

13
receiving the “death penalty”. A death penalty is the sentence of execution for

murder and some other capital crimes (serious crimes, especially murder, which

are punishable by death). The capital offenses include espionage, treason, and

death resulting from aircraft hijacking. As far as HUAWEI is concerned, the

administration has accused the Company of spying on behalf of Beijing, mainly

for its own national security and to steal American intellectual property. This

sentence therefore prohibits Huawei from buying parts from US companies

without federal government approval. Since Huawei is reliant on US suppliers

for parts like chips, it could prove a major blow to the Chinese firm. Huawei,

unsurprisingly, is unhappy about the decision, saying in a statement that

America’s “unreasonable restrictions will infringe upon Huawei’s rights and

raise other serious legal issues.” Thus, the decision by the United States to

impose tariffs on all Chinese products and put smartphone maker Huawei on a

trade blacklist that could choke off vital components has severely damaged the

fragile trust between the two countries, forcing China to re-examine the entire

bilateral economic relationship to protect itself. Besides, the ZTE incident can

also be mention amongst US sanctions. In fact, ZTE was self-inflicted because it

flouted an embargo on US components sold to Iran and then tried to cover up the

wrongdoing. In April 2018, after the company failed to properly reprimand the

employees involved, the US Department of Commerce banned US companies

(semiconductors) from exporting to ZTE for seven years. This incident thus came

at a time of increased trade tensions between the US and China. The escalation of

US trade tariffs and the Huawei blacklisting have also reinforced Beijing’s long-

14
standing belief that it has to rely on itself for key technologies and resources

(ECB, 2018).

3. US-China Trade War Effects: Bilateral and Multilateral

3.1. Effects on Both Countries—Bilateral Effects

As trade talks stall and the two superpowers further entrench their

positions, a long road remains ahead. The results for now are somewhat of a

mixed bag: the US is ahead in some ways, while China has an advantage in

others. Ultimately, though, everyone pays a price (Liadze, 2018).

In fact, both economies are showing signs of weakness in recent weeks but

China’s appears to be slowing at a faster pace. The US-China trade war resulted

in billions of dollars of losses for both sides in 2018, hitting industries including

autos, technology—and above all, agriculture. Broad pain from trade tariffs

outlined by several economists shows that, while specialized industries

including US soybean crushing benefited from the dispute, it had an overall

detrimental impact on both of the world’s two largest economies (Vogel, 2018).

The US and Chinese economies each lose about $2.9 billion annually due to

Beijing’s tariffs on soybeans, corn, wheat and sorghum alone, said Purdue

University agricultural economist Wally Tyner. The losses may give US

President Donald Trump and his Chinese counterpart, Xi Jinping, motivation to

resolve their trade differences before a March 2 deadline, although talks between

the economic superpowers could still devolve. Concerning US and China

exchange new blows in trade war, we strongly believe that disrupted agricultural

trade is hurting both sides particularly hard because China is the world’s biggest

soybean importer and last year relied on the United States for $12 billion worth

15
of the oil seed. Taking as example that China has mostly been buying soy from

Brazil since imposing a 25 per cent tariff on American soybeans in July in

retaliation for US tariffs on Chinese goods. US soybean exports to China, the

world’s top buyer, have plummeted during the bitter bilateral dispute, with

swelling supplies sending prices to near-decade lows. China has therefore mostly

been buying soy from Brazil since imposing a 25 percent tariff on American

soybeans in July in retaliation for US tariffs on Chinese goods. The surge in

demand pushed Brazilian soy premiums to a record over US soy futures in

Chicago, in an example of the trade war reducing sales for US exporters and

raising costs for Chinese importers. Speaking of this trade war effect between

both side, Tyner said: “It’s something that’s crying for a resolution. It’s a lose-lose

for both the United States and China.” For both countries, this war will impact

their income, therefore, lead to negative effects on GDP(Lovely & Liang, 2018).

3.2. Effects of US-China Trade War on Other Countries—Multilateral

Hostility between the US and China is a threat to global peace and

prosperity (Erken, Every, & Giesbergen, 2018). Outsiders cannot halt this conflict.

But they are not helpless. If the big powers stand outside the multilateral trading

system, others can step in.

The war between both economic powerhouses will not only hurt them,

but will also affect the global economy. The trade war cast a long shadow over

the Asia-Pacific Economic Cooperation forum in Papua New Guinea in

November, resulting in the leaders failing for the first time to issue a joint

communique. And as the China-US conflict has rolled on, it has spilled over into

16
a broader strategic concern, one some analysts have described as the start of a

new cold war.

However, these tensions could be seen as an advantage to some. It is true

that American and Chinese industries will be affected, but it is not clear how

much damage individual industries will suffer, as it depends on prices, the status

of production, etc. of other exporting countries (Yu, 2014). On the other hand,

third countries to which places of production have been transferred from the US

or China will get the benefits. However, of all export industries, the (US)

agricultural industry will suffer a major setback, because it cannot move its place

of production. Apart from products which only the other party in the trade war

can supply, disadvantages created for consumers in the importing country are

limited compared with the case where tariffs on imports from countries all

around the world are raised because they can find other sources of supply.

4. Road to Best Mitigate the Escalation of US-China Trade War

It’s sometimes said that: “世界上没有什么不可以解决的问题” (To every

problem its solution). Or as proverb tells us that big problems need big solutions,

the US-China trade war is not an exception. Although many business leaders in

both countries have already called for a resolution, added to the failure of a

series of trade talks—including low-level discussions in Washington in late

August to yield a breakthrough; the Chinese side reportedly canceled scheduled

talks in September, with US officials signaled that they would not return to the

negotiating table without a concrete proposal from Beijing, and besides the

recently China and the United States agreement to a 90-day ceasefire on new

tariffs in their trade war at the G20 summit in Buenos Aires, allowing a reprieve

17
after months of threats and stalled talks, we could say that, finding a common

compromise and negotiations still stand as the best ways for every kind of

tensions. And therefore, hope for better future in US-China commercial ties is to

be expected.

As both countries trade ties are governed by WTO rules, there is need to

organize appropriate round table negotiations in which both countries could try

to see how to manage such a conflict. We could take the metaphor of

soccer/football to break it down, in where both countries are both World Cup

champions seeking for victory (World Economic Forum). They’re both there to

play football but they have very different ideas... each team plays a very good

game but the rules they play are designed to showcase different skill sets. As

football has its rules, so does trade ties. As both countries are playing in the same

field with WTO as regulator, redefining each party’s rights and obligations and

as far as Trade relations are concerned, trying to find common Trade Agreement,

where there will be more liberal trade, flows could pave the way to mitigate and

avoid a further escalation of tensions.

To another extent, we could regard the US-China trade war as a fight for

supremacy picked by the US with China taking up the gauntlet. Or as in The

Thucydides Trap when one great power threatens to displace another, war is

almost always the resulting. As this trade war between both countries seems to

be more the results of fight for supremacy, to avoid it to escalate to an hundred

(100%) per cent war, Talks and round-tables could be taken where countries

could decide to have no more an unilateral world (US longtime see as Number

18
one Power), but a bipolar one, where both US and China could be considered as

Decisions makers.

5. Conclusion

In contrast to the situation after the Great Depression where many

countries slapped higher tariffs on goods imported from the rest of the world,

only the US and China have hit each other with high tariffs in this recent trade

war. In this respect, the damage caused by the US-China trade row to the world

economy is not as serious as that caused by the trade war after the Great

Depression. A free trade agreement (FTA) is designed to mutually reduce tariffs

between two or more countries. In contrast to this, the US and China have raised

tariffs on each other’s goods, as if they had entered into an “anti-FTA,” thanks to

which third countries can export their goods to them with tariffs on their exports

remaining relatively low. The dispute between the US and China over soybeans

has indirectly benefited Brazil, while that over beef, Australia, and that over

automobiles, Japan.

The most to be worried about is the “big change”, or “the global Clash of

Civilizations” the world is about to experience. Both countries see themselves as

exceptional: the US sees itself as “City upon the Hill” that has a mission to spread

Democracy and individual Freedom worldwide, if necessary by force of arms;

with a 5000-year-old Civilization, China believes that it is the “Middle Kingdom”

that naturally sits at the apex of the regional and international order. Moreover,

due to the US, longtime being considered as the “Number One Country” in

19
many areas, the Trump Administration is facing the world’s bigger challenge

ever experienced before. Trump is more concerned about this quite rise. Those

concerns include US complaints about Chinese intellectual property theft and

industrial subsidies, centered on Beijing’s state-backed “Made in China 2025”

initiative, a program to turn China into a leader in a range of advanced

technologies (Wei, Xie, & Zhang, 2017).

Thucydides has predicted such a huge challenge in The Peloponnesian

war (Thucydides, 2017), in which he analyzes the relation between Sparta vs.

Athens; where Sparta is seen as the dominating power but with weakness and

Athens as the rising country, which at the end wins the War on Sparta. As we

have mentioned above, this is a war of hegemony, as it is more difficult for a

longtime hegemony country to view his leadership slowly be taken by a

subordinate country.

Given te fact that from the latest press release, China is considered as the

bigger “Space country” to be the first to discover “the hidden part of the Moon”,

this situation could be seen as a shock or a crash experienced by the international

world in this early 2019. Nowadays, China is no more a “copy paste Country”

(König, Song, Storesletten, & Zilibotti, 2017) as the European world used to call

her, but a “country with Innovations”. In this sense, Napoleon’s (1817) Statement

thus finds their meaning, when he stated: “China is a sleeping Lion, and when

she awakes, the World will shake!”. From this discovery of the “hidden part of

the Moon” and coupled with the country’s economy growth, military and

scientific potential, we could say that the world has already begun shaking. Here

20
the question to raise is: can America and China really escape the Thucydides

Trap?

Limitation of Research

We mainly focused on the trade dispute that has prevailed so far between

the two economic superpowers, namely China and the United States. Besides, a

special emphasis was also put on their clash of hegemony. What has been

observed is that the trade confrontation between Beijing and Washington is a

battle for world hegemony. As a result, after thirty years of moving towards a

global single market governed by World Trade Organization (WTO) rules, the

foundations of the international order are experiencing a major upheaval. Thus,

are the United States ready to welcome this change? Will they accept find

themselves number two? How far is China capable of “Making China Again” by

rejuvenating its nation?

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[13] Terence, C. (2019). Understanding the China-US Trade War: Causes,

Economic Impact, and the Worst-Case Scenario. EPS Journal.

[14] Thucydides (2017). The History of the Peloponnesian War. New York:

Dover Publications Inc.

[15] Vogel, S. (2018). Changing the Soybean Trade Rhythm. Rabobank.

[16] Wei, S. J., Xie, Z., & Zhang, X. (2017). From “Made in China” to

“Innovated in China”: Necessity, Prospect, and Challenges. Journal of Economic

Perspectives, 31, 49-70.

https://doi.org/10.1257/jep.31.1.49

[17] Wu, H. X. (2014). China’s Growth and Productivity Performance Debate

Revisited. The Conference Board Economics Working Papers No. 14-01.

23
[18] Yu, M. (2014). Processing Trade, Tariff Reductions and Firm Productivity:

Evidence from Chinese Firms. The Economic Journal, 125, 943-988.

https://doi.org/10.1111/ecoj.12127

[19] https://cen.acs.org/policy/intellectual-property/US-files-complaint-over-

Chinas/96/i14

[20] https://definitions.uslegal.com/d/death-penalty-law/

[21] https://democracyjournal.org/magazine/52/trade-parade-of-broken-

promises/

[22] https://www.bloomberg.com/graphics/2019-us-china-who-is-winning-the-

trade-war/

[23] https://www.cnbc.com/2019/09/12/ahead-of-trade-talks-china-makes-

biggest-us-soybean-purchases-since-june-traders-say.html

[24] https://www.everycrsreport.com/reports/RL33536.html

[25] https://www.hrw.org/legacy/campaigns/china-99/china-

testimony0216.htm

[26] https://www.reuters.com/article/usa-trade-china-idCNL1N1YP2EZ

[27] https://www.reuters.com/article/us-usa-trade-china/u-s-china-impose-

further-tariffs-escalating-trade-war-idUSKCN1L809K

[28] https://www.scmp.com/comment/insight-opinion/article/2142491/why-us-

sanctions-zte-might-turn-out-be-best-thing-chinas

[29] https://www.telegraph.co.uk/news/worldnews/asia/china/8796486/Why-

China-wont-conquer-the-world.html

[30] https://www.thebalance.com/trade-wars-definition-how-it-affects-you-

4159973

24
[31] https://www.vox.com/2019/5/16/18627471/trump-china-trade-war-huawei-

xi

[32] https://www.vox.com/world/2018/7/6/17542482/china-trump-trade-war-

tariffs

The Economic Impacts of the US–China Trade War

Pablo D. Fajgelbaum and Amit K. Khandelwal

Department of Economics, Princeton University, Princeton, New Jersey, USA

August 2022

25
 Abstract

In 2018, the United States launched a trade war with China, marking an

abrupt departure from its historical leadership in integrating global markets. By

late 2019, the United States had imposed tariffs on roughly $350 billion of

Chinese imports, and China had retaliated on $100 billion of US exports.

Economists have used a diversity of data and methods to assess the impacts of

the trade war on the United States, China, and other countries. This article

reviews what we have learned to date from this work.

1. INTRODUCTION

In early 2018, the United States raised tariffs on a few large import items:

washing machines, solar panels, steel, and aluminum. Although these tariffs did

not discriminate by origin, it soon became apparent that US trade policies were

targeting China. The United States subsequently increased tariffs on thousands

of products from China between 2018 and 2019, ultimately targeting roughly

$350 billion of imports from that country. China retaliated over several tariff

waves, targeting about $100 billion of US exports. The two parties signed an

agreement to halt further tariff escalations in January 2020, but the existing tariffs

remained in place as of 2021.

26
 The trade war stands out as one of the largest and most abrupt changes in

US trade policy history, particularly when juxtaposed against the leading role

historically played by the United States in driving tariff reductions around the

globe. As the trade war unfolded, economists attempted to assess its economic

impacts. This article reviews these efforts and synthesizes what we have learned.

The research has largely explored the two central questions in

international economics: What are the aggregate welfare consequences of trade

barriers? How is this aggregate change distributed within a country?

To assess the aggregate impacts of the trade war, standard trade models

reveal that a crucial component is the pass-through of tariffs to import prices.

From the previous literature, and given the presumption that the economies of

the United States and China are large enough to affect prices, it would have been

natural to expect an incomplete pass-through of tariffs (i.e., that import prices

before applying the tariffs would fall with the tariffs). In contrast, empirical work

has found complete pass-through of tariffs to tariff-inclusive import prices (i.e.,

tariff-inclusive import prices rose one-for-one with the tariff changes) when

looking across exporting countries or products differentially exposed to tariffs.

We discuss potential explanations for this finding. The aggregate impacts also

depend on producer effects that materialize through export prices and on

changes in tariff revenue. We review approaches that have estimated these

components.

The main takeaways from this research are that US consumers of

imported goods have borne the brunt of the tariffs through higher prices, and

27
that the trade war has lowered aggregate real income in both the United States

and China, although not by large magnitudes relative to GDP.

We also review papers that have explored the distributional consequences

of the trade war on consumers and producers, changes in employment across

sectors, and the spatial impacts on income and consumption across the United

States. We conclude with thoughts on the open questions that would be

important to address in future work.

2. BACKGROUND

The US–China trade war unfolded over a series of tariff waves between

2018 and 2019. In January 2020, the two countries signed the Phase One

agreement to deescalate trade tensions, yet the tariffs remained in place as of late

2021. We summarize the key events of the trade war, but we refer readers to the

summary by Bown & Kolb (2021) and the comprehensive discussion by Bown

(2021) for more details.1

In February 2018, following a Section 201 investigation of solar panels and

washing machines, the US International Trade Commission determined that

imports of these products had injured domestic producers, and President Trump

imposed safeguard tariffs. These first tariff waves targeted specific products from

many countries. Shortly thereafter, additional tariffs on steel and aluminum were

imposed based on Section 232 investigations by the US Department of

Commerce.2 These tariffs also targeted several countries including China, with

some large economies (e.g., the European Union and Canada) initially being

exempted. China and other trade partners imposed retaliatory tariffs in response.

28
 Subsequent stages of the trade war were largely conducted between the

United States and China. In August 2017, the United States initiated a Section 301

investigation of China's trade practices, and on March 22, 2018, the Office of the

US Trade Representative accused China of unfair trade practices ranging from

the forced transfer of technology to Chinese firms to intellectual property theft.

On these grounds, the United States ultimately implemented five tariff rounds on

Chinese exports—in July 2018, August 2018, September 2018, June 2019, and

September 2019—with China retaliating at each stage. The United States and

China canceled a sixth tariff wave in December 2019 in anticipation of the Phase

One agreement. Once the deal was signed in January 2020, both sides agreed to

reduce the tariffs from the September 2019 wave by half, but the tariffs remained

in place as of September 2021.

In terms of magnitudes, the United States imposed tariffs (including other

trade partners) on 17.6% of its 2017 imports. Imports as a share of 2016 GDP were

about 15%, so the United States raised tariffs on import transactions

corresponding to about 2.6% of GDP, with the average tariffs increasing from

3.7% to 25.8%. On the export side, trade partners retaliated on 8.7% of the 2017

exports.3 Exports as a share of 2016 GDP were about 12%, so trade partners

imposed retaliations on exports corresponding to about 1% of US GDP, with

average tariffs rising from 7.7% to 20.8%. Therefore, the US and Chinese tariffs

targeted imports and exports amounting to 3.6% of US GDP. China raised tariffs

on about 11% of imports, and about 18% of its exports were targeted by the

United States (Chang et al. 2021). With import and export shares of 2017 GDP of

17.9% and 19.7%, respectively, the trade war affected transactions equivalent to

29
about 5.5% of China's GDP.4 China further hampered US access to its market by

reducing its most favored nation (MFN) tariffs on about 10% of its imports.

In comparison, the 1930 Smoot-Hawley legislation raised average tariffs

from 34.6% to 42.5% on dutiable imports that were equivalent to 1.4% of GDP,

and several foreign trade partners retaliated (Canada, which accounted for 20%

of US exports, raised duties on a third of US exports to Canada; see Irwin 1998,

2017). Thus, by the metric of GDP targeted by tariffs, the US–China trade war

appears more substantial than the Smoot-Hawley tariffs.5 Another way to gauge

the magnitude of the trade war is to consider the fraction of products targeted by

tariffs. Roughly two-thirds of 10-digit imported and exported products were

targeted with tariff increases (Fajgelbaum et al. 2021a), whereas Smoot-Hawley

raised tariffs on 27% of dutiable products (Irwin 2017).

Of course, the context of the US–China trade war differs substantially

from that of the Smoot-Hawley tariffs. Those tariffs were launched on the eve of

the Great Depression, whereas global real growth in 2017 was 3.7% (IMF 2018).6

The nature of globalization today is also quite different, most notably due to the

volume of trade and its composition, with two-thirds of global trade now being

in intermediate goods (Johnson & Noguera 2012, Antràs & Chor 2021). A general

tariff increase today may affect not only the prices that final consumers pay but

also the costs for firms that use those goods as inputs for production, a force that

the papers discussed below try to account for. The United States imposed tariffs

on 67% of imported intermediate inputs and capital goods from China

(representing 62% of the total Chinese imports targeted), and China also imposed

30
tariffs on 67% of intermediate inputs and capital goods from the United States

(representing 81% of the US imports targeted; see Bown 2021).

Although we focus on the economic consequences of the trade war,

understanding its political motivations is also important. This episode stands

alongside recent backlashes against globalization: It took place 2 years after the

2016 UK Brexit referendum, 1 year after the United States withdrew from the

Trans-Pacific Partnership, and 1 year before the United States blocked the

appointment of judges to the WTO Appellate Body.7 These episodes

materialized against a background of growing inequality related, among other

forces, to China's ascent in the world economy (Autor et al. 2016, 2019; Pierce &

Schott 2016, 2020) and to labor-saving or skill-biased technological change

(Goldin & Katz 2010, Acemoglu & Restrepo 2019). In this context, trade policy

can become a powerful electoral tool if deployed to benefit some groups.8

Electoral motivations were indeed visible in the 2016 Trump presidential

campaign, which ran on an anti-globalization platform of tariffs on China.

Fajgelbaum et al. (2020) provide suggestive evidence of electoral motivation,

consistent with a median-voter view of politically motivated tariffs (Mayer 1984,

Dixit & Londregan 1995). They find that counties with approximately balanced

Republican and Democratic constituencies in the 2016 presidential election

received more import protection from the 2018 tariff waves than did heavily

Democratic and Republican counties.9 However, they also find that China's

retaliatory tariffs mostly affected Republican-leaning counties, largely because

these counties tend to be rural and the Chinese tariffs were large in agriculture.

Blanchard et al. (2019) argue that the political consequences of the trade war did

31
not pay off for the Republican Party in the 2018 congressional election, as

counties more exposed to the retaliatory tariffs reduced support for Republican

candidates.

3. WELFARE IN THE STANDARD TRADE MODEL

We organize the discussion around a well-known formula dating at least to Dixit

& Norman's (1980) work. In neoclassical models, the aggregate equivalent

variation, EV, corresponding to a change in import tariffs—i.e., the sum of

money that would suffice, if properly distributed across the agents in the

economy, to leave them indifferent to a tariff change—can be expressed, to a

first-order approximation, as

where and are vectors denoting quantities of imported and exported

commodities before tariffs change, and are the import and export prices, τ are

ad-valorem import tariffs, R is tariff revenue, and Δ denotes the difference

between the post- and pre-trade war outcomes.10

The import prices are what the importing country faces when buying

from the world, i.e., the price at the port. However, buyers inside the country pay

the tariff-inclusive price . So the importer cost, EVm, encompasses all buyers of

imported goods, both firms and final consumers. The export prices are the prices

faced by domestic producers selling abroad, and EVx is the change in export

value that they perceive. The last term, ΔR, is the tariff revenue received by the

government.

32
 The part of the consumer cost EVm is transferred to the government as

tariff revenue and washes out from the previous expression, which simplifies to

This formula holds in neoclassical environments regardless of how

complex they may be. It holds for any input-output structure or with

heterogeneous consumers. Therefore, if one is content with the assumptions of

neoclassical trade theory and with first-order approximations, to measure EV it

suffices to use information on the trade flows and import tariffs before the trade

war and on the changes in international prices and in import quantities caused

by the trade war.

Before going on, it is worth pointing out that this expression holds in

models with perfect competition. Virtually all the estimates we review in this

article were implemented under this assumption. The welfare impacts of tariffs

can be different in contexts of imperfect competition if profit-shifting

considerations are strong (see Brander 1995 for a review of strategic trade policy

theory).

The formula says that a country is made better off by terms-of-trade

increases (lower import prices or higher export prices ) and worse off by

distortions (). Conveniently, and perhaps counter-intuitively, this depends on

gross trade, which is readily observable, rather than on value-added trade, which

would be much harder to measure.11 The other components, the changes in

international prices and import quantities caused by the trade war, present a

33
challenge. The empirical and quantitative approaches reviewed below impose

structure to measure how responded to the trade war tariffs.

Before discussing the estimates, it is worth reviewing how tariffs affect

each term in Equation 2. In principle, every price and trade flow could respond

to every tariff, but the theory guides the signs and welfare implications of some

of these relationships. First, consider import prices. The mechanical effect of a

tariff is to raise the tariff-inclusive price of the commodity being taxed, lowering

the demand for imports of that commodity. Through market clearing, and

assuming away well-known paradoxes such as those discussed by Lerner (1936)

and Metzler (1949), this reduction in demand lowers the before-tariff import

price but typically not enough to fully offset the tariff increase, so that the tariff-

inclusive price increases. The increase in the tariff-inclusive import price relative

to the tariff increase is the tariff pass-through rate; the smaller it is (i.e., the larger

the decline in ), the greater the gains extracted by the importer from trade

partners through terms-of-trade improvements.12 Second, the reductions in

import quantities due to tariffs matter through their impact on tariff revenue.

Turning to export prices, the logic we have just discussed implies that the prices

of exported commodities should fall with retaliatory tariffs. In addition, the flip

side of before-tariff import prices falling with tariffs is rising export prices, a

manifestation of Lerner's symmetry: As tariffs reallocate resources away from

export-oriented activities and demand away from imports, US producer prices

increase, and so do export prices.13 Finally, import and exports prices may be

indirectly affected through cost increases via input-output linkages if imported

intermediates are used in the production of exports.

34
 In the next two sections, we review papers that have computed the import

and export prices necessary to construct the welfare consequences of the war. As

noted, doing so requires measuring the full distribution of price changes

triggered by the tariffs. In practice, identifying this distribution is challenging.

Tariffs affect the prices of highly disaggregated imported transactions, with a

change in one tariff potentially affecting the import prices of several goods as

demand is reallocated and general-equilibrium adjustments take place. Because

tariff changes are not randomly assigned, identifying their impacts typically

requires controlling for potential confounders at the product, sector, and/or

country level; the cost of including these controls is that price effects on goods

other than those being taxed cannot be inferred. For example, these controls may

absorb the impacts that the tariff changes—particularly large ones—may have

across products, sectors, or countries through the wage adjustments required for

market clearing at those levels.

The papers that we review in Section 4 typically identify the changes in

US import prices from China relative to other origins within a product or across

imported products within a sector. In doing so, these empirical specifications are

able to measure only relative price changes within products or within sectors but

do not estimate the full distribution of price changes. They do not identify the

product-, sector-, or country-level components of the price changes potentially

caused by the war. This gap between the partial distribution of price changes

estimated in the regressions and the entire distribution of price changes needed

for Equation 2 can be filled in through additional assumptions in general-

equilibrium models, and we review those in Section 6.

35
 4. IMPORTERS

4.1. Tariff Pass-Through

A group of papers studies the response of US import prices to US tariffs (Amiti et

al. 2019, Fajgelbaum et al. 2020, Flaaen et al. 2020, Cavallo et al. 2021). This

measurement allows to compute EVm. These analyses define a commodity as a

product-by-origin dyad in international trade data. The presumption is that,

within a product category, countries sell differentiated varieties. The typical

regression examines export prices (i.e., the prices of goods at the dock before

tariffs are levied), that is,

where g is a product code, t is a month, i is a country exporting to the United

States, and the controls (which we discuss below) include fixed effects to account

for trends at a broader level.14 These fixed effects determine the source of

variation that identifies pass-through and are important to interpret the results,

as we discuss below. Dealing with the endogeneity of tariffs is, of course, a

concern in analyses of the effects of trade policy (Goldberg & Pavcnik 2016). In

the case of the trade war, this research has demonstrated that, conditional on the

fixed effects that enter in the controls, the tariff changes are uncorrelated with

previous price and import trends across products (e.g., Amiti et al. 2020b,

Fajgelbaum et al. 2020, Cavallo et al. 2021).

The pass-through rate from tariffs to tariff-inclusive prices we have

discussed in the previous section is 1 − β. Incomplete pass-through means a β

between zero and one. In the case of small importing countries whose demand is

36
unlikely to affect international prices, the pass-through should be close to

complete (a β of zero). The pass-through should be incomplete (a β greater than

zero) and larger for importers carrying enough weight in world demand to

influence prices. For example, if an importer commands a very large share of an

exporter's total sales of a product, the exporter may not easily reallocate to other

markets, making supply more inelastic at least over the short run. A more

inelastic supply, in turn, implies lower pass-through. So, when prices are

expressed before tariffs as in Equation 3, complete pass-through is revealed by β

= 0 and incomplete pass-through by β > 0.15

Various strands of the literature prior to the trade war provided support

for incomplete pass-through; that is, countries seem typically able to affect the

terms of trade in their favor using tariffs.

First, the most closely related strand directly examined regressions similar

to Equation 3. Despite the centrality of tariff pass-through for the welfare effects

of trade policy, the list of papers directly estimating tariff pass-through that were

written before the trade war is short. This list includes the works of Kreinin

(1961), Feenstra (1989), Winkelmann & Winkelmann (1998), Hummels & Skiba

(2004), Mallick & Marques (2008), Ural Marchand (2012), Irwin (2014), De

Loecker et al. (2016), and Ludema & Yu (2016).16 These papers mostly find

incomplete pass-through in applications across different countries and time

periods (see Table 1). For example, Feenstra (1989) estimates a β of 0.43 from US

tariff increases on Japanese trucks in the 1980s, and Irwin (2014) finds a β of 0.24

from US import tariffs on sugars between 1891 and 1914. Outside this range,

37
Winkelmann & Winkelmann (1998) find complete pass-through in the context of

the trade liberalization of a small importer (New Zealand in the mid-1980s).

Second, several studies have estimated import demand and export supply

elasticities that can be used to inform tariff pass-through.17 Romalis (2007) uses

NAFTA tariff cuts and finds evidence of incomplete pass-through, with an

implied β of 0.79.18 Broda & Weinstein (2006), Broda et al. (2008), Soderbery

(2015), and Irwin & Soderbery (2021) do not use tariff variation but estimate

import demand and export supply elasticities following the approach proposed

by Feenstra (1994). The estimates from these papers also imply incomplete pass-

through. For example, Broda et al. (2008) estimate elasticities at the product level

for 15 non-WTO countries from the late 1990s to the early 2000s. Their estimates

imply a median β across all products within each country that ranges between

0.79 and 0.95 across countries. That is, their elasticities imply that every country

in their sample—even though the sample consists of small importers, except for

China and Russia—has potentially strong power to manipulate international

prices with tariffs. Furthermore, they find positive correlations between tariffs

and inverse supply elasticities, suggesting that countries engage in some terms of

trade manipulation.

Finally, a large literature has examined the related concept of exchange rate pass-

through. From the perspective of an exporter to the United States, a depreciation

of the exporter's currency is a positive demand shifter as much as a tariff

reduction. Hence, appreciations of the exporter's currency and import tariffs

should have similar effects on prices. The typical finding has been incomplete

exchange rate pass-through: A depreciation of the exporter's currency typically

38
increases the foreign-currency prices faced by the importer. Goldberg & Knetter

(1997) review earlier results that imply a pass-through rate β of about 0.4 (see

also Burstein & Gopinath 2014). In Japanese auto imports, Feenstra (1989) finds

support for the symmetry hypothesis.

Against these priors, it is surprising that several papers find pass-through

to be virtually complete during this trade war (i.e., β = 0). Moreover, the United

States and China account for a reasonably large fraction of each other's trade

across many of the product categories affected by tariffs, so one would expect

tariffs to affect bilateral prices that clear the US–China markets. Across six-digit

products in 2017, China accounted for an average 23% of US imports, and the

United States accounted for an average 12% of Chinese imports. The pass-

through evidence is robust, and it was identified by several research teams

working independently and using different data sources and at various time

horizons.

Fajgelbaum et al. (2020) match the tariff changes to publicly available US import

and export data at the HS10 product level19 and implement the specification in

Equation 3 for both the United States and China as importers at a monthly

frequency. As controls, their benchmark specification includes fixed effects by

product-time, exporter-time, and exporter-sector. Therefore, the identification

comes from differential variation in tariff changes across exporters to the United

States within a product. That is, they ask whether China lowered its prices

relative to other exporters within products in response to tariffs. Fajgelbaum et

al. (2020) estimate a β = 0.00 [standard error (SE) = 0.08]. Using the same data and

39
a similar regression but 12-month differences instead of monthly changes, Amiti

et al. (2019) estimate β = −0.012 (SE = 0.023). In follow-up analysis that includes

the September 2019 waves, Amiti et al. (2020b) and Fajgelbaum et al. (2021a) find

that the pass-through remains complete over a 1-year horizon.

Those studies used publicly available trade data. Although the HS10

product definitions used in these analyses are narrow, they consist of aggregates

of potentially many transactions across individual goods and sellers. Cavallo et

al. (2021) estimate tariff pass-through using confidential micro data on the import

prices that underlie the import price indices constructed by the Bureau of Labor

Statistics (BLS). They estimate Equation 3 at the monthly level with a lag

structure and with the bilateral exchange rate as an additional independent

variable, relying on variation across both exporters to the United States and

products.20 They find a cumulative 1-year value of β = 0.018 (SE = 0.030). In

contrast to the near complete tariff pass-through, they estimate an incomplete

exchange rate pass-through of 25–35%, in line with previous work.21

The finding of complete pass-through implies that the importer cost

(EVm) from Equation 1 can be easily calculated as the increase in the cost of the

pre-trade war import basket keeping import prices constant. This cost is the

product of three terms: the import share of GDP (15%), the fraction of US imports

targeted by tariff increases (17.6%), and the average import price increase among

targeted varieties (which equals the average tariff increase of 22.1% due to

complete pass-through). This calculation implies that import buyers lost in

aggregate 0.58% of GDP. This number means that importers have been 0.58%

40
worse off in real terms relative to the pre-trade war scenario for the entire time

that the tariffs have been in place.22

So far we discussed the result for the United States, as this has been the

focus of most research. However, Chang et al. (2021) and Ma et al. (2021)

implement the specifications of Fajgelbaum et al. (2020) and Amiti et al. (2019),

respectively, from the perspective of China, and both find complete pass-

through. The complete pass-through in China reinforces the surprising nature of

the results: In standard general equilibrium, if an importer faces an elastic export

supply from an exporter, then that exporter would typically be able to

manipulate the terms of trade using trade policy. During the trade war, however,

neither country seemed able to manipulate the terms of trade in its favor.23

As we have mentioned, these pass-through calculations come with an

important caveat. The estimates compare price changes across exporters within a

product or across products. Therefore, the impacts of tariffs that are common

across exporters or products are not reflected. For example, the results do not

rule out that US tariffs lowered the overall wage level in China relative to the

United States and therefore lowered the price level of all Chinese goods exported

to the United States. Assessing these effects requires a general-equilibrium

model, which we discuss in Section 6.

4.2. What Might Explain Complete Pass-Through?

We speculate on possible explanations for the complete pass-through

result, although we stress that more research into the mechanism is required. For

this, it is worth reminding that complete pass-through reflects inelastic demand

or elastic supply—in either case, the incidence of the tax falls on the importer.

41
More explicitly, the regression in Equation 3 can be thought of as the reduced

form of an import demand and foreign export supply system. Let

be the US import demand of a variety (a commodity from an exporting country),

where σ is the domestic import demand elasticity, p* is the import price, τ is an

ad-valorem tariff, and A is a demand shifter accounting for expenditures and

preference shocks;24 and let

be the inverse foreign supply from that exporter to the importing country, where

ω is the inverse foreign export supply elasticity, and Z is a cost shifter accounting

for wages and productivity. Combining these two equations gives Equation 3,

with β = 1/[1 + (ωσ)−1]. So β = 0 occurs with infinitely inelastic domestic import

demand (σ → 0) or infinitely elastic foreign export supply (ω → 0).

Therefore, in this simple framework, to understand complete pass-

through one needs a story of inelastic demand or elastic supply.25 Short of these

alternatives, the explanation for the results could lie in the behavior of the

demand and supply shifters, A and Z above, which may also be responding to

the tariffs. We review the plausibility of these and other possible explanations

next.

4.2.1. Inelastic demand. An explanation of complete pass-through based on

inelastic demand can be plausibly ruled out by the results found by Fajgelbaum

et al. (2020). They use the tariff variations as instruments to recover (σ, ω) from

42
Equations 4 and 5, and they find σ = 2.53 (SE = 0.26).26 Hence, their findings are

consistent with an infinitely elastic foreign export supply but with a finite and

relatively low demand elasticity across origins.4.2.2. Elastic supply. Another

possibility is that, at the variety level, supply happens to be very elastic: This

would mean that China can easily reallocate exports from the United States to

other destinations when demand falls. Indeed, Fajgelbaum et al. (2020) estimate

ω = −0.002 (SE = 0.05) for Chinese exporters. This hypothesis implies that, at the

product level, the value of exports to the world for the Chinese products taxed

by the United States should not have fallen much. Fajgelbaum et al. (2021b)

estimate that, across products, US tariffs led China to reduce exports to the

United States but also to increase exports to the rest of the world, and they

cannot reject that Chinese (product-level) exports to the world remained

constant. Hence, US tariffs did not seem to impact product-level Chinese exports,

suggesting a seamless reallocation of Chinese exports away from the United

States into other markets within products. Jiao et al. (2020) use firm-level data on

the universe of firms from one Chinese prefecture, and their estimates suggest no

declines in firm-level sales to the world despite a decline in sales to the United

States, which is again consistent with the relatively easy reallocation across

destinations of a product, at least for Chinese producers.4.2.3. Demand shifters.

Demand-side explanations could mask a decline in import prices before tariffs if

the demand shifter A increases in products with higher tariffs. This could

happen due to the dynamic decisions of importers of durable goods: If current

tariffs are an indication of even bigger future restrictions, buyers who can carry

inventory will increase current demand in anticipation of even further tariff

43
increases. Alessandria & Mix (2021) provide evidence of anticipatory effects in

previous tariff events, but this hypothesis has not been linked to pass-through.

Another possibility related to demand shifters is that the tariffs triggered

simultaneous improvements in average product quality that offset (quality-

unadjusted) price declines. An extensive literature documents quality-based

selection, such that firms selling higher-quality and therefore more expensive

products enter tougher destinations (see Hummels & Skiba 2004 and Manova &

Zhang 2012, among others). Ludema & Yu (2016) note that quality-based

selection matters for how the tariffs affect quality-unadjusted import prices: As

tariffs increase, firms selling more expensive products survive, pushing import

prices up. However, this explanation for complete pass-through seems unlikely

for continuing products, because Cavallo et al. (2021) and Flaaen et al. (2020) also

document complete pass-through in more disaggregated price data. It is possible,

however, for quality upgrading to operate on an extensive margin of product

entry and exit, an hypothesis that has not yet been assessed.4.2.4. Supply

shifters. Various mechanisms related to the supply shifter Z could mask an

upward-sloping supply (and hence a finding of incomplete pass-through if this

supply shifter was properly controlled for). First, firms’ unit costs vary with

imported intermediates,27 and particularly so for Chinese exporters (e.g., Brandt

et al. 2017, Amiti et al. 2020a). If firms import and export the same products, and

taking into account that there is overlap in the product categories taxed by the

United States and China (64% of six-digit HS codes are tariffed by both

countries), then a specification like Equation 3 could yield very small or complete

pass-through because the tariffs would raise the costs of Chinese exporters,

44
pushing up exporter prices and potentially offsetting the reduction in prices due

to lower demand. Relatedly, if supply chains involve two-way trade within

narrow product categories, then US import tariffs may raise costs along the

chain, also increasing the costs of Chinese exporters. Second, there is

considerable evidence that trade liberalizations drive improvements in

productivity.28 Therefore, it could be that decreased access to US markets

reduced firm productivity, pushing costs up, but this seems unlikely at this time

horizon. A third explanation concerns unobserved policies. It is possible that the

Chinese and US governments provided subsidies to firms, such as farm subsidies

in the United States (Blanchard et al. 2019). If these subsidies were systematically

chosen to offset foreign tariffs, Z and τ would be correlated in such a way to

leave export prices constant.4.2.5. Contracts with sticky prices. The tariffs were

imposed without much warning to firms, so the duties were levied on top of

prices that had already been contracted. This could explain complete pass-

through early on. However, complete pass-through persists for up to 2 years,

hence it must have applied to new orders after tariffs were enacted. Jiao et al.

(2020) surveyed 600 Chinese firms on how the tariffs affected their export prices,

with 21% indicating inflexibility to adjust prices due to contractual agreements.

Thus, price stickiness could explain part of the pass-through finding. Still, as

documented by Fajgelbaum et al. (2020) and Amiti et al. (2019), imports did fall

sharply with the tariffs, suggesting that preexisting commitments were unlikely

to be binding beyond the period in which the trade war started. This means that

stories based on contract inflexibility must allow for sticky prices with lower

quantities. A related idea from the exchange-rate literature is that pass-through

45
would be complete if import prices were sticky and denominated in dollars

(Gopinath et al. 2010). This idea has the extra appeal of reconciling the complete

pass-through to tariffs in the trade war with incomplete exchange rate pass-

through. As discussed earlier, such stickiness would need to operate at horizons

beyond 1 year to explain the data.4.2.6. Market structure. The prediction that

import prices fall with tariffs is borne out of standard neoclassical assumptions of

perfect competition and increasing marginal costs. However, tariffs may increase

import prices if there is foreign market power, and this force may offset the

declining prices due to increasing marginal costs. This could be the case under

specific conditions on the curvature of the import demand faced by a foreign

monopolist (Brander 1995) or in models with import bargaining where the terms-

of-trade impacts of trade policy depend on bargaining power.294.2.7. Level of

aggregation. The result that β = 0 in the estimation of Equation 3 with exporter-

time fixed effects is consistent with standard general-equilibrium quantitative

trade models such as the Armington model used by Anderson & Van Wincoop

(2003): In this model, the terms of trade move with relative wages, responding to

tariffs in order to preserve market clearing. Supply is infinitely elastic to each

destination, conditional on the wage.30 Therefore, the result of complete pass-

through is not surprising in the context of that model. Still, standard trade

models would predict incomplete pass-through at some level of aggregation for

a sufficiently large importer or for a small importer trading differentiated

products. So, even if pass-through is complete when comparing imported

varieties of a product, it may not be complete when comparing, for example,

imports of differentially exposed products. However, some of the previously

46
discussed papers continue to find evidence of complete pass-through across

products: Fajgelbaum et al. (2020) estimate a version of Equation 3 at the product

level (i.e., examining the change in a product-level price index instead of ),

obtaining a product-level β = −0.09 (SE = 0.20), and Cavallo et al. (2021) rely on

product-level variation for their analysis in which they find β to be close to

zero.31

Nevertheless, market clearing conditions necessarily lead to incomplete pass-

through at some level of aggregation, such as at the sector and country levels.

Indeed, Cavallo et al. (2021) find that, without any controls or fixed effects to

absorb country-level trends, their regression yields some incomplete pass-

through, β = 0.079 (SE = 0.026). While this result is suggestive that pass-through is

present at some higher levels of aggregation, the pass-through at these higher

levels is still difficult to estimate due to possible correlation with country-level

trends. As discussed below, simulations of quantitative models can reveal the

magnitude of these effects.

4.3. Consumer Prices

The pass-through estimations discussed above look at prices at the port. These

are the prices faced by the country as a whole, which therefore matter for

aggregate welfare. As we discuss below, the complete pass-through result

discussed above illustrates one important dimension of redistribution: There

were considerable losses for US imports buyers, matched almost completely by

47
gains to US producers. Of course, many buyers of imports are firms rather than

final consumers.

The most direct way to assess consumer effects through higher prices is

looking at consumer prices. Flaaen et al. (2020) analyze the retail price of one

product of the trade war (washing machines), which was among the earlier

products to be tariffed. As the washing machine tax was nondiscriminatory, the

authors compare the prices of washing machines with those of other appliances.

Using oven ranges as a control product, they find no evidence of incomplete

tariff pass-through; if anything, their result implies more than complete pass-

through, with consumer washing machine prices increasing 125%.

However, Cavallo et al. (2021) suggest that complete pass-through to retail

prices may not hold broadly. They use online prices from two large US retailers

and are able to identify goods that are subject to the tariffs. In contrast to the

complete pass-through at the port, they find that final consumer prices are barely

affected. Thus, for retail goods such as household goods and electronics, the cost

of the tariffs fell on the retailers, not on the final consumers. However, they also

document that retailers increased their purchases ahead of tariff announcements

and were therefore not necessarily exposed to the tariffs. This would translate the

incidence of the tariff on importers of nonretail goods (which included a large

fraction of all tariffed goods) or on agents that were unable to anticipate the

tariffs or stock up. It is also possible that, as the tariffs remain in place and the

stocks that retailers accumulated before the tariffs dwindle, the prices are

eventually passed on to final consumers. In either case, an important path for

48
future work is to assess the incidence of the tariffs across final consumers,

retailers, wholesalers, and other agents within the supply chain.

5. PRODUCERS

5.1. Export Prices

The welfare formula in Equation 2 states that the producer impact hinges

on how export prices respond to tariffs. As discussed above, tariffs could affect

export prices through three channels: Foreign tariffs could dampen foreign

demand, and domestic tariffs could increase imported input costs or reallocate

expenditures to domestic goods.

Consider first the retaliatory tariff channel. US export or producer prices

may fall in response to Chinese retaliation, leading to lower welfare through EVx

in Equation 1 by lowering . Fajgelbaum et al. (2020) and Amiti et al. (2020b) show

that US variety-level export prices to China relative to other destinations did not

fall in response to retaliatory tariffs, suggesting that US producers may adjust

flexibly across destinations. Similar to our previous caveat that import price

responses estimated across origins within a product do not capture product-level

import price changes, these regressions do not capture that US producer prices

could fall in products or sectors facing higher Chinese tariffs, regardless of where

these products are shipped. Indeed, using BLS microdata on exported goods,

Cavallo et al. (2021) find relative price reductions in US products targeted by

China. At more aggregate levels, Fajgelbaum et al. (2020) present evidence that

US sector-level export price indices fell with retaliatory tariffs in the same sector.

Neither them nor Flaaen & Pierce (2019) find evidence of sector-level producer

prices falling with retaliation, but capturing sectoral price impacts from

49
retaliations may be difficult because exports are typically a small share of sectors’

total sales.

Turning to the second channel, US export prices could also increase

through costlier access to imported inputs. In the aggregate welfare calculation of

Equation 1, these export price increases would offset part of the greater buyer

cost from EVm, but on net the cost increases would be welfare reducing.

Benguria & Saffie (2019), Flaaen & Pierce (2019), and Handley et al. (2020)

estimate this impact of US tariffs, and they generally find that indeed export

prices raise with US tariffs through the rising cost for imported inputs. For

example, Flaaen & Pierce (2019) find that an interquartile shift in exposure to

rising input costs is associated with 4.5% relative increase in factory-gate prices.

Finally, export prices may also increase with import tariffs, leading to

higher welfare through EVx in Equation 1. As domestic demand is reallocated

away from imports into domestically produced goods, export supply is restricted

and domestic goods become more scarce internationally, and therefore more

expensive. Fajgelbaum et al. (2020) and Amiti et al. (2020b) find evidence

suggesting that the US producer price index increases with the import tariff.

5.2. Reallocations

The trade and employment reallocations from the trade war are related to

changes in relative incomes and expenditures, and thus they also give a sense of

winners and losers. The estimated trade reallocations between the United States

and China have the expected signs: Within products, US and Chinese imports

and exports are reallocated away from each other into other origins and

destinations, respectively. For example, Amiti et al. (2019) and Fajgelbaum et al.

50
(2020) use specifications similar to Equation 3 but with import quantity as a

dependent variable, finding that imports decline with tariffs at an elasticity of β =

1.31 (SE = 0.09) and β = 1.47 (SE = 0.24), respectively. Their event studies suggest

that this response is persistent. On the export side, several studies also document

sharp decreases in US exports to China relative to other destinations in response

to the lower Chinese demand from retaliatory tariffs (see Benguria & Saffie 2019,

Amiti et al. 2020b, Fajgelbaum et al. 2020).

Fajgelbaum et al. (2021b) shift the focus away from the United States and

China to study how other countries not directly exposed to trade war tariffs

reallocated trade. Their main specification considers, for each country, the

change in product-level exports to the United States, China, and the rest of the

world as a function of the US and China tariffs on each other. They find that, on

average, countries reallocated exports into the United States and away from

China in response to the US–China tariffs, and they strongly increased their

exports to the rest of the world. Their findings suggest downward-sloping

supply curves due to scale economies or other forces for a subset of countries

that increased exports to both the United States or China and the rest of the

world. Using pre-war export shares to weigh the predicted export changes across

products, they also find that the growth in total exports induced by the trade war

was highly heterogeneous across countries, but this heterogeneity was due to

country-specific supply curves or demand substitution elasticities with the

United States and China rather than to product-level specialization patterns.

The previously discussed papers study trade reallocations across origins

or products. Flaaen & Pierce (2019) examine instead employment reallocation.

51
They match the tariffs to monthly industry-level employment from the Current

Employment Statistics program of the BLS. Their interest is in understanding

both the impacts of tariffs on employment across industries and the role of the

three channels we have already mentioned: import protection, rising input cost,

and foreign retaliation. Their results indicate that the first channel modestly

raises employment, but these gains are more than offset by the negative

consequences of the other two channels. Overall, moving an industry from the

25th percentile to the 75th percentile of exposure along these three measures of

tariff exposure reduces manufacturing employment by 2.3%. Thus, this study

suggests that trade policy in a world with supply chains and the prospects of

retaliation can undo the positive direct impacts of tariffs on employment.32

Waugh (2019) examines the impact of the Chinese retaliatory tariffs on

county-level employment data from the BLS Quarterly Census of Employment

and Wages. His estimates suggest that total employment responds negatively to

the retaliatory tariffs: A county in the upper quartile of the tariff distribution

experienced a 0.75 percentage point decline in employment growth relative to

the lower quartile. These magnitudes are about twice as large for private-sector

employment in the goods sector, which was directly affected by the trade war

tariffs.

Thus, the early evidence from these papers suggests that the trade war has

not raised manufacturing employment in the United States.

6. AGGREGATE AND DISTRIBUTIONAL EFFECTS

6.1. Adding Up Consumer and Producer Impacts

52
 Combining the impacts on prices and trade reallocations, we can compute

the aggregate effects in Equation 2. As we have discussed, a possible reading of

the results on import tariff pass-through and export price effects is that neither

import nor export prices moved much. Starting from a situation close to free

trade, and assuming small changes in imports for products that did not face

import tariffs, the absence of price changes readily implies that a first-order

approximation to EV in Equation 2 was approximately zero. Under the same

neoclassical assumptions, a closed-form expression for the second-order

approximation is . The tariff change Δτ is observed, whereas is estimated by

Amiti et al. (2019) and Fajgelbaum et al. (2020), as we have discussed. Applying

this formula and excluding 2019 tariffs, Amiti et al. (2019) find a loss equivalent

to 0.044% of GDP, and Fajgelbaum et al. (2020) estimate a loss of 0.059%. Further

including 2019 tariffs, Fajgelbaum et al. (2021a) find a loss of 0.17%.

These approximations are computed assuming complete tariff pass-

through. However, as discussed in the last conjecture of Section 4.2, the empirical

analyses at the variety level do not rule out terms-of-trade effects through

changes in prices at the sector or country level. Also, these back-of-envelope

calculations do not consider the possible impacts of retaliatory tariffs at these

higher levels of aggregation. These numbers are difficult to estimate empirically,

but existing research has simulated these effects in general-equilibrium models.

Fajgelbaum et al. (2020) combine the demand-side parameters estimated from a

nested constant elasticity of substitution (CES) import demand system in the

style of Broda et al. (2008), which accounts for substitution across products and

53
across origins within products, with a supply side of the US economy that

incorporates the three channels through which export prices respond to the

tariffs discussed in Equation 5. For the supply side, they assume a static general-

equilibrium model in which fixed factors give rise to upward-sloping supply at

the sector level, perfect competition, flexible prices, and an input-output

structure with unitary elasticities, calibrated to match US input-output tables.

Their simulations imply that the US export prices increased overall by 0.7% due

to tariffs in 2018. When multiplied by a 7.4% nonservice export share of GDP,

this yields an increase in EVx in Equation 1 of 0.05% of GDP. Further including

the 2019 tariffs, this component increases to 0.13%.

Including all the tariffs, and further adding up a simulated tariff revenue

gain of 0.34% of GDP33 and the previous result that the consumer cost EVm was

0.58%, the aggregate welfare loss in Equation 1 is 0.10% of GDP [Fajgelbaum et

al. (2020) estimate losses of 0.04% of GDP from the 2018 tariffs only]. Chang et al.

(2021) replicate their methodology on 2018–2019 tariffs and find an aggregate

welfare loss in China of 0.29%.

The simulations by Fajgelbaum et al. (2020) keep wages and aggregate

demands in foreign countries constant. Several analyses, including those by

Balistreri et al. (2018), Caliendo & Parro (2022), Charbonneau & Landry (2018),

and IMF (2018), simulate general-equilibrium impacts using multi-country

environments à la Eaton & Kortum (2002) that further account for the

equilibrium of the world economy.34 Despite the many methodological

differences with Fajgelbaum et al.'s (2020) work, the aggregate effects are similar

and are consistently found to be small relative to GDP and negative for both the

54
United States and China. For example, Caliendo & Parro (2022) obtain that the

trade war tariffs lower US and Chinese welfare by 0.01% and 0.09%,

respectively.35 This magnitude and similarity are not surprising, given the

observed trade-to-GDP ratios. As a benchmark, Costinot & Rodríguez-Clare

(2014) show that, in a standard parametrization of these frameworks, a 100%

uniform tariff imposed by the United States reduces welfare by approximately

0.3%, whereas Baqaee & Farhi (2021) compute that a 10% universal tariff shock

would increase US and Chinese welfare by 0.09% and 0.16%, respectively.36,37

These welfare effects appear small relative to GDP, but this does not mean

that the distortions due to tariffs are small. Finkelstein & Hendren (2020)

calculate that the US–China tariffs have a marginal value of public funds

(MVPF), defined as the ratio of real income costs of a policy to its revenue

benefit, ranging from −1.2 to −1.5. This implies that the tariffs are particularly

costly relative to many other public policies.38

6.2. Stock Market and Uncertainty

As the trade war unfolded, the announcements of impending tariffs

through social media and official government proclamations grabbed the

headlines. These announcements coincided with sharp and typically negative

movements in equity markets. Some analyses have relied on these movements to

identify the impact of the trade war tariffs on the valuation of exposed firms, and

they have added up these responses through different approaches to compute

the aggregate impacts of the war.39

Huang et al. (2020) run a 3-day event study centered around March 22,

2018, when the Trump administration announced the pending imposition of 25%

55
tariffs on the first wave of Chinese imports. Using a sample of US-listed

nonfinancial firms with sales in China or trade with that country, they find that

the tariff announcements resulted in 4.3% market decline losses. They argue that

about a quarter of the market losses was driven by firms’ direct import and

export exposure to China, while the rest was driven by changes in macro

variables or indirect exposure via supply chains. Amiti et al. (2021) use 11 tariff

announcements and implementations between 2018 and 2019. The market

dropped a cumulative 12.9% over a 3-day window around those events, and

their approach attributes the vast majority of this decline to the trade war.

These numbers stand in contrast with the results based on price changes

and terms of trade in static trade models; for example, they are an order of

magnitude or two larger than the approximately 0.01% to 0.1% decline estimated

by the models discussed in the last subsection. The reasons behind the striking

difference in these numbers is an open question. As argued by Amiti et al. (2021),

one possibility is that static models do not incorporate potentially important

mechanisms, such as dynamic losses or growing uncertainty.40 The counterview

is that very short-run stock market response at the time of tariff announcements

may not reflect the actual impact of tariffs on fundamentals. For example, market

participants may not have experience pricing an uncommon policy shock and

may require a longer time window to assess the potential impacts on the real

economy. Methodologically, the event windows used in stock market analyses

are much shorter and temporary than the before-versus-after comparisons of

tariff implementations used in the event studies we discussed in Section 4.1.

56
 Efforts to reconcile the stock market responses with the welfare impacts

from trade models constitute a promising area of work.

6.3. Local Labor Markets and Distributional Consequences

Trade shocks including tariffs have different impacts across regions within

countries, particularly when labor is imperfectly mobile (Topalova 2010, Kovak

2013, Autor et al. 2016). Fajgelbaum et al. (2020) merge the product-level US and

China tariffs with (pre-war) counties’ sectoral employment wage bills, and they

use their model to simulate real wage changes across US counties. Their results

indicate a large dispersion: On average, real wages in the tradable sector decline

by 1%, but with a large standard deviation of 0.5% across counties. This

dispersion reflects specialization patterns: The Great Lakes region of the Midwest

and the industrial areas of the Northeast received higher tariff protection,

whereas the Midwestern plains and Mountain West faced higher tariff

retaliation, as about 27% of China's retaliations targeted US agricultural goods

(Bown 2021). Caliendo & Parro (2022) simulate state-level effects in a framework

that additionally allows for internal trade costs, so that differences in real income

also arise from differential price index effects, with losses ranging from about

0.1% to 0.2% across states.

Lack of data availability has so far prevented an analysis of actual wage

changes across regions in response to the trade war, and recent studies have

considered other less standard outcomes. Waugh (2019) studies welfare effects

by examining consumption patterns across counties.41 The paper exploits

monthly data on new automobile registrations, which are available at the county

level in nearly real time, as a proxy for consumer expenditures. The data

57
captures consumption of only one (albeit important) durable good and records

counts as opposed to values. Assuming that county price changes are

uncorrelated with tariff exposure, differences in auto expenditures are indicative

of income changes. The paper finds that, relative to a county in the lower quartile

of the retaliatory tariff distribution, a county in the upper quartile experiences a

3.8 percentage point decline in auto sales. In China, Chor & Li (2021) consider the

spatial impact of the trade war by examining changes in night light intensity in

relation to regional exposure to tariffs, and their analysis also reveals large

heterogeneity in impacts across locations.

7. OPEN QUESTIONS

The US–China trade war represents the most important trade policy shift in

recent decades, and it provides researchers with an unusual opportunity to study

the mechanics of global trade. Throughout this article we mentioned several

questions that remain underexplored, including the various conjectures for

complete pass-through that we have discussed. We conclude with a few

additional questions that deserve further scrutiny.

First, a natural follow-up would be to examine the longer-run aggregate

effects of the trade war. This includes reexamining pass-through at different time

horizons and levels of aggregation, but also examining systematically how pass-

through varies along the supply chain from the dock to retail prices. Second,

what are the impacts of trade barriers imposed by US and China in terms of

production relocation, risk-versus-efficiency trade-offs, and national security

implications? Third, as noted, US and Chinese firms could request exemptions

from import duties, which raises some natural questions: How did expectations

58
of potential tariff rebates affect importer behavior, and what political economy

channels influenced the decisions of firms to seek exemptions and the decisions

of governments to grant them? Fourth, what are the dynamic implications from

potential reductions in investment, changes in capacity, and differences in access

to imported inputs?

Turning to the distributional consequences of the trade war, the studies to

date analyze proxies for consumption, short-run employment effects, and model-

based implications for wages. As time passes, what will survey and

administrative data reveal about the distributional consequences through

consumption and income channels? What will be the long-run implications for

the spatial distribution of economic activity? For example, will the trade war

undo the labor market impacts of the China shock (Autor et al. 2016)? (As

discussed, the evidence thus far suggests a negative answer.)

Finally, questions about the geopolitical implications of the US–China

trade war are outside the scope of this review. Such questions often do not lend

themselves easily to clean econometric studies, but insights may be learned from

theoretical frameworks and work from other fields. Such questions include: How

much global “soft power” did the United States gain or lose by initiating the

trade war? How will the trade war affect the political relationship between

United States and China? And how will the world trading system evolve in

response?

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The Views of Chinese and International Scholars on the Causes of the US-China

Trade War

64
Yawei Chen, Abdul Mua’ti ,Zamri Ahamd, Mastura Mahamed, Diyana Kasimon

Faculty of Modern Language and Communication, University Putra Malaysia,

Kuala Lumpur, Malaysia

June 2022

Abstract

65
 This study collected articles (2018-2021) on the US-China trade war,

including 71 in the WOS database and 57 in the CNKI database (originating from

China), and analyzed the viewpoints of international and Chinese scholars on the

causes of the US-China trade war. The results show that both international and

Chinese scholars have basically the same views when analyzing and considering

the problems. They both believe that the trade deficit between the US and China

is the direct cause of the trade war, while US trade protectionism and the

“America First” mentality are the main reasons. They also agree that competition

for global economic leadership between the two countries is the main root of the

trade war. However, the difference between them is that international scholars

generally have broader academic horizons, more objective and fair expressions,

and more critical traditions. They tend to take a neutral position in analyzing the

causes of the trade war. They point out not only the causes and consequences of

the trade war, but also possible misjudgments by the United States. Chinese

scholars, on the other hand, have relatively narrower academic horizons, their

views are often nationalistic, and their narratives are more intense and

emotional.

1. Introduction

In recent years, the deterioration of relations between the United States

and China has attracted the attention of most countries in the world. The former

is a recognized superpower, while the latter is undoubtedly an economic giant

with growing comprehensive strength (Tzogopoulos, 2019). With the outbreak

COVID-19 of global economic and political turmoil, increasing competition

between major powers, and the failure of institutions designed to promote

66
international cooperation, the contradictions between the two countries have

greatly increased.

After World War II, US preeminence in the world order was reinforced by

interrelated norms, rules, institutions, and its ability to provide global public

goods. However, with the relative improvement of comprehensive national

strength, China has shaped the order with a more confident stance through the

narrative of “peaceful rise” and the “Chinese dream” (Kahl & Berengaut, 2020).

The rivalry between the two countries has led to talk of a “new Cold War” in the

international relations literature. Some argue that the COVID-19 pandemic has

shown a “moment of realignment” (Blackwill & Wright, 2020; Campbell & Rush,

2020). However, it has also been pointed out that the epidemic will only

accelerate, not change, the fundamental direction of international history (Haass,

2020; Michael & Medeiros, 2020). It is undeniable that the epidemic will be a

turning point in the restructuring of the international system and power

structure (Basu, 2020; Kahl & Berengaut, 2020).

If we look back at the evolution of US-China relations, we will see that

relations between the two countries began to deteriorate after President Obama

proposed the “Pivot to Asia” strategy against China. In 2018, the outbreak of the

US-China trade war accelerated the deterioration of relations between the two

countries. The economic and trade relations between the two countries not only

affect the economy and livelihood of people on both sides, but also the structure

of the world. On March 22, 2018, US President Trump signed a presidential

memorandum based on the findings of the “Section 301 investigation,” which

stated that “China’s theft of US intellectual property and trade secrets” imposed

67
extensive tariffs on goods imported from China and prevented Chinese

companies from investing and doing business in the United States to force China

to change its “unfair trade practices”. To which China responded in return. Since

then, the trade war between the two countries began and continues to this day.

During this time, scholars have conducted numerous studies on the US-China

trade war and produced a number of research findings. These include the causes

of the trade war between the US and China, the effects of the trade war and the

countermeasures to settle the trade war, etc. Among these findings, Chinese and

international scholars have both the same and different views in analyzing the

causes of the US-China trade war. In order to explore the similarities and

differences of these viewpoints and analyze the differences in the academic

visions of Chinese and international scholars reflected in these viewpoints, this

study analyzes the relevant literature

2. Method

The authors used “trade war” + “cause”, “US-China trade war” +

“reason”, “US-China trade dispute” as keywords and searched the Web of

Science database (WOS) and the CNKI database (in China) for relevant articles

(2018-2021). After excluding irrelevant papers, there are 71 papers in WOS and

57 articles in CNKI. Based on these papers, the authors sort and summarize the

views of scholars at home and abroad. To facilitate the distinction between the

opinions of different groups, we refer to the opinions published in domestic

journals in China as the opinions of Chinese scholars and the opinions published

in journals outside China as the opinions of international scholars.

3. Results

68
 After reading, compiling, and analyzing the literature, scholars’ views on

the causes of the US-China trade war can essentially be traced to the following

four dimensions.

3.1. The US-China Trade Deficit Is the Direct Cause of the US-China Trade

War

International scholars widely agree that China’s rise has benefited from

the global order that the United States has created since World War II. Thus,

China must become a good model for the global economy, not just a beneficiary.

Therefore, some international scholars believe that the trade deficit between the

United States and China caused by China’s non-compliance with international

trade rules and China’s trade protection policies are the direct causes of the trade

war (Lawrence, 2018; Malawer, 2018; Fatma & Bharti, 2019; Zhao, 2019b). They

explained that China had a bilateral trade surplus with the United States after

joining the World Trade Organization (WTO), but no mutually beneficial access

to the Chinese market for the United States and other countries. Against this

backdrop, the United States hopes to warn and pressure China to reciprocate

more in the future through a trade war. In addition, some scholars believe that

China’s trade protection policies, especially the “Made in China 2025” plan, not

only cause the trade deficit between the United States and China but also pose a

great threat to the global trading system (Fatma & Bharti, 2019; Lampton, 2017;

Lawrence, 2018; Malawer, 2018; Xing, 2018; Zhao, 2019b). Which policies include

subsidizing favored Chinese industries and requiring foreign companies to

transfer technology as a condition for entering the Chinese market.

69
 Some scholars, however, are skeptical about the reasons for the trade war

instigated by the United States. They questioned that the large trade deficit

between the two countries and the resulting decline in US output are just a

pretext (Guo et al., 2018; Stiglitz, 2018). For example, Nobel Laureate economist

Joseph E. Stiglitz stated that the high US trade deficit and shrinking industry are

the result of the combined effects of macroeconomic, domestic investment, and

savings levels, not trade with China (Stiglitz, 2018). The other scholars explained

that China’s industrial subsidy policies, while widespread, do not have a

significant impact on trade flows as de facto “import tariffs.” And as for forced

technology transfer, the existing cases or studies cannot prove whether

technology transfer is forced or a natural result of economic cooperation or

coordination. In light of this, the United States does not have enough evidence to

charge forced technology transfer or technology theft, and there is no reason to

start a trade war over this allegation (Guo et al., 2018).

Cameron College scholars Abdulhamid Sukar and Said Ahmed pointed

out that the statistical method of the origin principle and re-export trade

overestimates the US-China trade deficit in goods. Therefore, the Trump

administration’s trade strategy to address the bilateral trade deficit with China is

inconsistent with the underlying problems of the overall trade deficit and the

underlying macroeconomic conditions (Sukar & Ahmed, 2019). Some scholars

believe that imposing high tariffs to rebalance trade and revive production

reflects, to some extent, Trump’s misunderstanding that trade is a zero-sum

game (Lawrence, 2018; Malawer, 2020). In addition, some scholars have noted

that the US trade war, citing national security, could easily tempt other WTO

70
members to misunderstand trade and mimic retaliation, which would increase

countries’ trade barriers and reinforce unilateralism and disregard for and non-

compliance with WTO rules (Albertoni & Wise, 2020; Lawrence, 2018).

Regarding the impact of the US trade war with China, Australian scholar Kerry

Liu stated that it is impossible for China to make significant concessions in this

trade war because the “Made in China 2025” is very important for the

sustainable development of China’s economy and China’s transition to an

advanced, technology-driven economy (Liu, 2018b).

On the issue of the US-China trade deficit, most Chinese scholars bluntly

stated that the error in the calculation method of the US trade deficit was the

direct cause of the trade war (Chen, 2018; He, 2018; Tan et al., 2018; Yu & Zhao,

2018). They rarely addressed the question of whether China was violating

international trade rules or whether China was taking excessive trade defense

measures. Specifically, they argue that the US-China trade deficit data are

exaggerated. The reasons are as follows: 1) The US has a deficit in goods trade

with China, while China has a deficit in services trade with the US. The reason

for this lies in the peculiarities of their respective industrial structures and the

international division of labor. 2) The calculation method is wrong. Current

statistical methods in the United States have significantly overestimated the

actual size of the trade deficit between China and the United States. 3) Even if

there is a trade deficit, it is due to the strict restrictions imposed by the US

government on the export of high-tech products to China. Moreover, some

Chinese scholars pointed out that Trump’s direct intention is to blackmail

interests (Long, 2018; Wu, 2019; Xu, 2018). They stated that the huge budget

71
deficit accumulated over the years and the slowdown of the US economic growth

have made the US government under Trump even more worried. In this

situation, increasing revenue and reducing spending through trade with China

have become the Trump administration’s first choice to ensure the continued

existence of the United States (Long, 2018; Wu, 2019; Xu, 2018).

Comparing the views of international scholars and Chinese scholars, we

find that they basically agree that the trade deficit between the US and China is

the direct cause of the US-China trade war. The difference is that international

scholars have objectively pointed out the responsibilities and obligations that

China should assume after joining the WTO. In addition, some international

scholars have questioned US rhetoric when analyzing the huge trade deficit

claimed by the United States. However, most Chinese scholars adopt a

nationalist stance and tend to make a blanket denial of the so-called US trade

deficit, rather than providing a practical and convincing explanation for the US

accusation that China’s protectionist policies are causing the trade deficit.

3.2. US Trade Protectionism Is the Main Reason for the US-China Trade War

Most international scholars believe that US trade protectionism and the

“America First” mentality are the main reasons for the trade war (Fatma &

Bharti, 2019; Fred, 2018; Stiglitz, 2018; Sukar & Ahmed, 2019; Urata, 2020). Fred

Bergsten said that after his election, Trump repeatedly attacked the international

economic system and emphasized gaining trade advantages through national

strength, which is typical trade protectionist thinking (Fred, 2018). Indian scholar

Ayesha Fatma stated that the United States is not a victim of the trade war or far

from being portrayed as a victim by it. According to him, the United States has

72
put forward three false assumptions from the victim perspective: first, the United

States believes that it is providing excessive global public services with

enormous expenditures; second, US military strength supports the enforcement

of its trade and dollar hegemony; third, the United States must weigh the trade-

offs between domestic and international activities, believing that the resources

devoted to the latter can be easily used domestically for the goal of increasing

prosperity (Fatma & Bharti, 2019).

Scholar Stiglitz criticized Trump’s protectionism that the “America First”

ideology reveals one of the weaknesses of “capitalism and politics with

American characteristics”: Shortsightedness. Trump’s protectionist policies will

encourage countries around the world to form new alliances, abandon old ones

and help China open up new avenues of cooperation, he said. He also said that

protectionism hurts American workers more than China because China has

changed from an export-oriented economy to a domestic market-oriented

economy (Stiglitz, 2018).

Chinese scholars have criticized US protectionist policies even more

harshly. They claim that Trump wrongly attributes the decline of the United

States to the situation that many existing international organizations and allies

take advantage of the United States. This concept has led him to oppose the trend

of economic globalization with “economic nationalism” and multilateralism with

protectionism (He, 2018; Huang, 2018; Wu, 2019; Xu, 2018). Some of these

scholars emphasized that “economic nationalism” is used by the current US

administration as a fundamental method to correct the problems caused by US

foreign economic and security policies and globalization in recent decades,

73
which have led not only to the US-China trade war but also to the US-EU trade

war (Tan et al., 2018; Wu, 2019; Xu, 2018). In addition, some have pointed out

that the bitter political game between the two parties in the United States is also

one of the reasons for the trade war (Li, 2018a; Tan et al., 2018; Wu, 2019; Xu,

2018). In order to win the next general election, they pointed out that Trump

hopes to restrict trade between China and the United States and develop related

industries to create more job opportunities, and that he wants to win the support

of middle- and lower-level voters. They also said that although the two parties

have different opinions on many aspects, they can often reach a high level of

consensus and resonance on the China issue because opposition to China is a

common means of political competition between the two parties.

Looking at the main cause that led to the US-China trade war,

international and Chinese scholars essentially agree that Trump’s trade

protectionism is the main reason for the trade war. The difference is that Chinese

scholars have elevated Trump’s trade protectionism to the level of “economic

nationalism” and sharply criticize this economic nationalism for leading not only

to the US-China trade war but also to the trade war US-EU. International

scholars, on the other hand, take a relatively neutral position and emphasize that

Trump’s trade protectionism has also done great harm to the United States itself.

3.3. Competition for Global Economic Leadership Is at the Root of the US-

China Trade War

The view that competition for economic leadership in the world is the root

cause of the US-China trade war is supported by many international and Chinese

scholars (Allison, 2018; Fred, 2018; Li, 2018a; Xing, 2018; Zhao, 2019a). The most

74
conclusive viewpoint comes from Fred Bergsten, who said that the core of the

US-China trade dispute is a long-term systemic competition for economic

leadership in the world, encompassing politics, economics, ideology, value

orientation, security domain, and comprehensive national strength (Fred, 2018).

Specifically, China believes that the United States is delaying its rise, and the

United States believes that China will challenge its global dominance in all areas.

From the US perspective, China is a challenger that disrupts the existing order

(Basu, 2020; Blackwill & Wright, 2020; Kahl & Berengaut, 2020). Since the end of

the Cold War, the world’s major countries have submitted to the international

order led by the United States. However, after 2000, with the rapid development

of China’s economy and the continuous improvement of its international status,

China sought to completely destroy the United States’ allies and eventually

replace the United States as the most important power in Asia and the world

leader in science and technology (Blackwill & Wright, 2020; Zhao, 2019b).

Beijing’s long-term efforts are gaining ground as Beijing’s influence continues to

grow and Washington weakens internationally. Regardless of objective reality,

Beijing’s actions suggest that it likely believes it is playing a winning role

(Blackwill & Wright, 2020; Zhao, 2019b).

Scholar Allison stated that China and the United States inevitably fall into

the Thucydides Trap. He explained that unless Xi Jinping’s ambitions to

“rejuvenate China” fail, China will continue to challenge the United States for its

accustomed top position. As well as, Americans will not be able to tolerate

China’s rise unless the United States redefines itself to accept what is not “first”

(Allison, 2018). Scholar Ross noted that the United States and China are

75
undergoing power transitions. The continued development of power transitions

will certainly lead to more power competition (Ross, 2020). As Chinese President

Xi Jinping expects China to take an active leadership role in global politics, the

Belt and Road Economic Belt and the Asian Investment Bank have sought to

reduce the international influence of the United States, prompting the latter to

resolutely maintain its global dominance (Bhattacharya, 2019; Zhao, 2019a).

According to scholars, the following actions by China are considered a

challenge to US global leadership: 1) China’s counterattack in the US-China trade

war has drawn the ire of the United States. This is because the United States had

originally assumed that China would soon back down, but unexpectedly China

retaliated in equal measure (Fatma & Bharti, 2019; Zhao, 2019b). 2) China’s

proposed “Made in China 2025” plan has put tremendous pressure on the United

States, leading the US to believe that China is challenging its dominance in the

high-tech sector. Therefore, it is necessary to reduce China’s global influence to

maintain the technological advantages of the United States (Chen et al., 2020;

Zhao, 2019b). 3) China’s ability to solve the crisis makes the United States

nervous. The financial crisis triggered by the United States has spread across the

world since 2009, affecting many countries. However, China has successfully

responded to this crisis with the Chinese model, which made the United States

nervous (Zhao, 2019b). It is worth noting that in the face of US nervousness, the

Chinese government has subsequently taken a series of measures to reduce

tensions between the two sides, such as announcing a series of penalties for

intellectual property violations and formulating a plan to replace the “Made in

China 2025”; even the Standing Committee of the Chinese People’s Congress has

76
considered a draft law prohibiting the government from using administrative

means to force the transfer of foreign technology to domestic enterprises (Chen et

al., 2020). But unfortunately, the United States has not ended its trade war with

China.

As for Chinese scholars’ views on the competition for global economic

leadership between China and the United States, they mainly focus on the

following two points. First, they believe that the US is aimed at containing

China’s development. They explain that China’s rise has gradually narrowed the

power gap between China and the United States in various fields, which has

caused obvious pressure, fear and hostility in the United States, especially the

development of China’s high-tech industry, making the United States fear that

China will replace its global hegemony (Huang, 2018; Liu, 2018a; Tan et al., 2018;

Xu, 2018; Yu & Zhao, 2018). Long Guoqiang said that the areas where the United

States imposes tariffs mainly target the high-tech areas included in “Made in

China 2025,” reflecting the United States’ intention to slow down China’s

technological catch-up process (Long, 2018). The second point is that the trade

war represents US suppression of the Chinese development model. Chen (2018)

pointed out that in the longer term, the US trade war is a struggle between the

Chinese model and the Washington model, which are competing for dominance

in the world economy and the right to formulate the rules of the game of

economic globalization (Chen, 2018). In particular, the United States’ vigilance

and concern that other countries will follow the Chinese model is based on the

fact that the Chinese model has relative advantages in dealing with the financial

crisis and some important international affairs. Therefore, the United States

77
wants to stigmatize the Chinese development model through the war of opinions

triggered by the trade war (Chen, 2018; Long, 2018).

Moreover, almost all scholars have pointed out that the Trump

administration’s real motivation for the US-China trade war is to preserve US

hegemony (Chen, 2018; Li, 2018a, 2018b; Long, 2018; Tan et al., 2018; Wu, 2019;

Xu, 2018; Yu & Zhao, 2018; Zong, 2019). Li Qingsi, deputy director of the Center

for American Studies at Renmin College of China, pointed out that

“Washington’s stance on “Made in China 2025” and ZTE’s suspension of

shipments and heavy fines show that the trade war with China is not a simple

trade issue, but a strategic competition for the future development of the two

countries based on geographic competition. He stressed that containing China’s

development and strengthening US hegemony are the fundamental goals of the

United States in instigating a trade war (Li, 2018a). According to Tan Xiaofen of

the Central College of Finance and Economics, the United States instigated a

trade war because China’s economic strength and international influence have

weakened the status of the United States as the world hegemon (Tan et al., 2018).

The issue of US hegemony in the trade war has also attracted the attention

of international scholars. For example, Mearsheimer said that some Americans

attributed the failure of the United States’ pursuit of hegemony in the post-Cold

War era to the rapid development of other countries, including China. This

notion led the United States to establish anti-Chinese economic nationalism and

populism, which ultimately led to Sino-American relations undergoing the

greatest transformation in 50 years (Mearsheimer, 2019).

78
 Overall, international and Chinese scholars agree that competition for

economic leadership in the world is the root cause of the US-China trade war.

The difference is that international scholars have analyzed the urgency of the

current situation of competition between China and the United States for the

United States from the perspective of observers, and have also objectively

analyzed China’s competitive advantage in economic leadership in the world

and the Chinese government’s compromise measures. Chinese scholars, on the

other hand, have strongly condemned the hegemonic behavior of the United

States from the perspective of victims and emphasized that the trade war is a

typical form of containment and oppression. These views reflect a strong

nationalist sentiment and lack a rational and objective perspective. They simply

see the United States as the hegemon of the international order and ignore the

fact that China’s economy has continuously benefited from this so-called

hegemonic order.

3.4. Ideological Competition Is the Underlying Reason for the US-China Trade

War

Some international scholars pointed out that ideological competition is the

deepest reason for the United States to start a trade war with China (Fred, 2018;

Strasbourg, 2019; Zhao, 2019b). They explained that the reason why the United

States originally agreed to China’s accession to the WTO was so that business

could bring in American liberal and democratic values to change China’s

political system. However, it appears that the United States has failed in its

attempts to change China’s ideology through economic integration. Therefore,

the United States has engaged in a trade war with China to promote isolation.

79
 The Strasbourg study notes that there are two trends that give ideological

color to security and economic conflicts in US-China relations. First, China’s

restoration of authoritarianism and its state-directed industrial policies have

undone Western optimism that China will eventually achieve political and

economic liberalization after 40 years of global participation and integration.

Second, Hungary, Belarus, Brazil, and the Philippines have elected some unfree

leaders, raising concerns about the collapse and crisis of the democratic world.

These parallel developments have heightened concerns in the United States and

Europe that China’s example and influence are strengthening the power of global

authoritarianism (Strasbourg, 2019).

In the course of discussing ideological competition to wage the trade wars,

scholars have cited the views of the US government and some officials on

ideological competition. For example, the 2018 US National Defense Strategy

report states, China and Russia hope to shape a world that suits their

dictatorship… (US Government, 2018). Kiron Skinner, director of policy planning

at the US State Department, said, “Competing with China is a real struggle

between different civilizations and different ideologies” (Weiss, 2020). US

Congressman Mike Gallaher urged the United States to relearn the art of

ideological warfare. He stated that the United States can only win this contest by

challenging the fundamental legitimacy of the Chinese Communist Party and

thereby ensuring the survival of a free, open, and prosperous world (Gallagher,

2019). These views clearly show that the US government attaches great

importance to ideological conflicts with China and deliberately provokes

ideological competition.

80
 Some scholars disagree with the views of the US government. For

example, Suisheng Zhao stated that although the United States has reasons to

prevent ideological competition in China, there is little evidence that the Chinese

Communist Party is pursuing a deliberate strategy to export autocracy and

undermine democracy. because most dictatorships lack an ideology of expansion

and tend to resist the erosion of Western democratic ideology. In particular, for

the Chinese Communist Party, it is much more important to focus on

maintaining authoritarian rule at home than spreading authoritarian ideas

abroad (Zhao, 2019b). However, scholar Friedberg disagreed. He explained that

although China’s current rulers do not promote their repressive policies and a

quasi-market economy, the richer they become, the more their model would

encourage and strengthen other potential dictatorships to follow suit. At the

same time, it is possible to weaken the institutions of young and developing

democracies (Friedberg, 2018).

In the field of ideological competition, only one Chinese scholar has

clearly mentioned that the United States expects China to integrate into the

world economy through reform and opening up, carry out economic

liberalization, and thereby achieve political democratization. However, the

reality of China’s development has entrenched the authoritarian system, which

deeply disappoints hopeful American policymakers (Li, 2018b). This view

appeared only once in 57 Chinese papers, suggesting that most Chinese scholars

do not believe that ideological differences are the cause of the trade conflict

between the two countries. The reason could be that China is primarily a country

where the spirit of pragmatism is paramount. People usually pay more attention

81
to practical and economic factors and rarely think about competition on an

ideological level. Second, China is a secular country, and in its thousands of

years of history, the coexistence of different religions and ethnic groups has

shaped the relatively tolerant values of the Chinese people. This has led to a

widespread belief in China that ideological differences among people are a

general and universal phenomenon that is not sufficient to affect economic

exchanges between the two countries.

There are significant differences between Chinese and international

scholars in analyzing the deepest causes of the trade war. Some foreign scholars

have focused on this cause and discussed it extensively, while Chinese scholars

have hardly mentioned it. This difference shows that there are differences in

depth of thinking and academic vision between them. Chinese scholars tend to

pay more attention to the superficial and current influencing factors such as the

US trade deficit, US trade protectionism and the psychology of hegemonism, etc.,

while the academic vision of international scholars focuses not only on the

present and current but also on the underlying factors.

4. Conclusion

Scholars’ opinions show that both Chinese and international scholars have

basically the same angles in analyzing and considering problems. For example,

they all agree that the trade deficit between the US and China is the direct cause

of the trade war, while US trade protectionism and the “America First” mentality

are the main reasons for the US trade war. They also agree that the competition

for global economic leadership between the United States and China is the root

cause of the US trade war. However, there are significant differences between

82
international and Chinese scientists in terms of the specific analysis process and

methods. International scholars tend to have a broader and deeper academic

vision, which make their expressions are more objective and fair, and have a

critical tradition. They tend to take a neutral position to analyze the causes of the

US trade war and point out not only the causes and consequences of the trade

war, but also the possible mistakes of the United States. For example, in

analyzing the direct causes of the trade war, international scholars generally

believe that China’s non-compliance with international trade rules and China’s

trade defense measures caused the United States’ trade deficit and that the

combination of these factors led the United States to start a trade war with China.

At the same time, they also questioned whether the US trade deficit may not be

as large as the US claims, and they also condemned US hegemony.

Compared to international scholars, Chinese scholars have a relatively

narrow and superficial academic vision, which often makes their views

nationalistic and their narratives more intense and emotional. Most of them only

use hostile psychology to analyze the motives of the United States from the

perspective of the victims, instead of looking at the cause of this contradiction

between the two countries from an objective and fair perspective. In addition, it

is worth noting that they are also critical, but this criticism is usually directed

against other people (or countries) and not against themselves. For example,

most of them only emphasize that the US started the trade war based on wrong

statistical methods and hegemonic psychology, while ignoring or obscuring

some questions that should be answered positively: for example, are the US

accusations against China true? This includes, first and foremost, whether China

83
has a problem with not complying with international trade rules (especially

whether China should open up its promised economic fields)? And whether

there is excessive trade protection in China (especially whether there is a

phenomenon of forced technology transfer)?

Second, the difference in the academic vision of Chinese and foreign

scholars is also reflected in the depth of thinking. International scholars can often

think about the causes of things in a broader context, while Chinese scholars tend

to focus only on the current influencing factors. For example, international

scholars have analyzed deep-seated ideological factors, emphasizing that the

United States had expected China’s economic development to lead to political

democratization, and that now disappointment with this outcome is the deepest

reason for the United States to wage a trade war against China. However,

Chinese scholars rarely mention this factor or generally ignore it.

The results of this study show that most Chinese scholars have almost the

same perspectives as international scholars in considering and analyzing the

problems related to the causes of the US-China trade war. However, their

narrative logic is usually easily influenced by nationalist narratives, causing

them to fall into victim logic and lose an objective and fair position. This may be

a common phenomenon among Chinese scholars.

In view of this, we suggest that Chinese scholars should adopt a rational

attitude to study the research objects instead of paying too much attention to

their ethnic identity, as academic research should not be subordinated to value

judgments and cannot be an instrument for moral preaching and political

enlightenment, but should maintain a calm, neutral and profound attitude.

84
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 The ‘bystander effect’ of the US-China trade war

Pablo Fajgelbaum, Pinelopi Goldberg, Patrick Kennedy, Amit Khandelwal,

Daria Taglioni

June 10 2023

91
 Abstract

The US-China trade war raised tariffs on roughly $450 billion in bilateral

trade and marked a turning point in the globalisation era. This column examines

the impact of the trade dispute on trade opportunities for bystander countries

and finds that it generally enhanced trade opportunities for most countries rather

than just causing shifts in trade patterns across destinations. The authors also

find an important role for country factors driving the responsiveness to tariffs, as

opposed to more standard explanations related to sectoral scale elasticities and

specialisation patterns.

Introduction

In 2018-19, a major trade conflict started between the US and China. The

US imposed tariffs on about $350 billion worth of Chinese imports, and China

retaliated by levying tariffs on an additional $100 billion worth of imports, a

retaliatory action allowed by WTO rules (Bown 2018). Despite an agreement in

January 2020 to halt further tariff hikes, the existing ones remain. The scale of this

trade dispute is substantial. US tariffs affected around 18% of its imports,

equivalent to 2.6% of its GDP, while China's retaliation impacted 11% of its

imports, equivalent to 3.6% of its GDP. These tariffs affected multiple industries

92
in both countries and increased costs for about two-thirds of dutiable products in

the US (Figure 1). The conflict's magnitude and scope outstripped the 1930

Smoot-Hawley Tariff Act, the most notable protectionist move in over a century

of US trade policy, which raised tariffs on 27% of dutiable products equivalent to

1.4% of GDP, as per Irwin (1998, 2017).

Figure 1 US (left) and China (right) tariff changes in 2018-19, by sector

In a recent paper (Fajgelbaum et al. 2023), we look at the economic

implications of the US-China trade war for the rest of the world, or ‘bystander’

countries. Our analysis is complementary to general equilibrium analyses such as

Bekkers and Goes (2022), who estimate substantial welfare losses from a

hypothetical US-China decoupling.

Our analysis reveals three main insights. First, there is a large cross-

country variation in the extent to which the trade war tariffs affected countries’

exports. Second, and somewhat surprisingly, for a subset of countries, global

exports among products taxed by the US or China grew faster than untaxed

products. Third, a country-specific component of the tariff elasticities – rather

than product or sector-specific elasticities combined with specialisation patterns

– appears to play a crucial role in explaining different responses across countries.

93
These insights could have important implications for policy by focusing attention

on countries’ potential to seize opportunities from a changing global trade

landscape.

Economic impacts on the US and China

The escalation of tariff changes between the US and China in 2018-19 has

had significant economic impacts on these two countries, as illustrated by the

works of Amiti et al. (2019), Bown (2021), Cavallo et al. (2021), Chang et al.

(2021), Fajgelbaum et al. (2019, 2020, 2023) and Flaaen et al. (2020), among others.

The main takeaways from this research are that US and Chinese consumers of

imported goods have borne the brunt of the tariffs through higher prices and that

aggregate real income in both the US and China declined due to the tariffs.

Bystander countries and opportunities

In our paper, in contrast, we examine how bystander countries’ exports

changed in response to the tariff changes. We examine the export responses of

the largest 48 exporters to three destinations: the US, China, and the rest of the

world. We examine the heterogeneity in tariff responses by implementing an

empirical specification that makes trade elasticities vary by importer, exporter,

sector, and measures of the variety size. The identifying assumption is that,

within country sectors, potential export growth across products would have been

the same in the absence of the trade war tariff changes.

The research reveals that the US-China trade conflict impacted bystander

countries in sometimes surprising ways compared to ex-ante assessments such as

Piazza et al. (2019). Many countries boosted their exports to the US in products

targeted by increased US-China tariffs, consistent with the expected trade

94
diversion effect (Figure 2, top-left and top-right panels). 1 More surprising is that

these countries also increased their exports to the rest of the world (RoW), while

their exports to China remained largely unaffected by the tariffs (Figure 2,

bottom-left and bottom-right panels). 2

Figure 2 Bystander effect

95
 Overall, the findings suggest that the trade war generally enhanced trade

opportunities for most countries rather than just causing shifts in trade patterns

across destinations.

We also show that the responses varied significantly across countries. For

instance, some countries’ responses suggested that they substitute Chinese

exports, while others responded as complements. Countries such as Vietnam,

Thailand, Korea, and Mexico emerged as major export ‘winners’ in global

markets for products where US-Chinese trade declined. Meanwhile, a set of

countries, including Ukraine, Egypt, Israel, and Colombia, saw a decline in

exports. Figure 3 visually illustrates these differences by ranking the 48 largest

bystander countries based on their predicted global export growth in products

targeted by the US-China trade war tariff adjustments relative to untaxed

products.

When we dig deeper into the determinants of this heterogeneity, we find

that variation in tariff elasticities by country largely drives the variation across

96
countries, as opposed to pre-war product specialization patterns combined with

variation in tariff elasticity by sector or size of trade flows.

Our study also underscores the interplay between supply and demand

heterogeneity in the elasticities, indicating a substantial interdependence across

export destinations. WE develop a framework to categorize countries’ export

responses based on the signs of their demand substitution with the US and China

and the slope of supply curves. For instance, countries such as Mexico, Malaysia,

and the Czech Republic export goods that may be substitutes for Chinese goods

but complements to US goods. Their exports benefited from the trade war both

because of their complementarities and substitution effects and because they

were operating along a downward-sloping supply curve. These countries might

have viewed the trade war as an opportunity to invest in new facilities, trade

infrastructure, or trade and investment facilitation. Alternatively, these countries

might have enjoyed better credit reallocation conditions (Hassan et al. 2020) or

they might have already been well integrated into global trade, allowing them to

seize new exporting opportunities across various sectors.

Conclusion

The US-China trade conflict opened doors for bystander nations, largely

increasing their exports to the US and globally with no significant change in

exports to China. The response varied, driven largely by country-specific

elements, which in some cases suggested downward-sloping supply curves.

Our analysis finds an important role for country factors driving the

responsiveness to tariffs, as opposed to more standard explanations related to

sectoral scale elasticities and specialization patterns. This suggests that country-

97
specific reforms and institutions may be important determinants for driving how

countries’ exports respond in this new era of globalization.

Works Cited

[1] Amiti, M, S J Redding, and D E Weinstein (2019), "The Impact of the 2018

Tariffs on Prices and Welfare", Journal of Economic Perspectives 33(4): 187-

210.

[2] Bown, C (2018), “Trump's steel and aluminum tariffs: How WTO retaliation

typically works”, VoxEU.org, 8 March.

[3] Cavallo, A, G Gopinath, B Neiman, and J Tang (2021), "Tariff Pass-Through at

the Border and at the Store: Evidence from US Trade Policy", American

Economic Review: Insights 3(1): 19-34.

[4] Chang, P L, K Yao, and F Zheng (2021), “The response of the Chinse economy

in the US-China Trade War: 2018-19”, Working Paper.

[5] Fajgelbaum P D, A K Khandelwal (2022), “The Economic Impacts of the US-

China Trade War”, Annual Review of Economics 14: 205-228.

[6] Fajgelbaum P D, P Goldberg, P J Kennedy, and A K Khandelwal (2019), “The

Return to Protectionism”, VoxEU.org, November 7.

98
[7] Fajgelbaum P D, P Goldberg, P J Kennedy, and A K Khandelwal (2020), “The

Return to Protectionism”, The Quarterly Journal of Economics 135: 1-55.

[8] Fajgelbaum P D, P Goldberg, P J Kennedy, A K Khandelwal, and D Taglioni

(2023), “Trade War and Global Reallocations”, NBER Working Paper 29562

and World Bank PRWP 9894.

[9] Flaaen, A, A Hortaçsu, and F Tintelnot (2020), "The Production Relocation

and Price Effects of US Trade Policy: The Case of Washing Machines",

American Economic Review 110(7): 2103-27.

[10] Góes, C and E Bekkers (2022), “The impact of geopolitical conflicts on

trade, growth, and innovation: An illustrative simulation study”, VoxEU.org,

29 Mar.

[11] Hassan, F, V Rappoport, and S Federico (2020), “Trade shocks and credit

reallocation: Lessons from Italy”, VoxEU.org, 25 Jun.

[12] Irwin, D (1998), “The Smooth-Hawley Tariff” A Quantitative

Assessment”, Review of Economics and Statistics 80: 326-334.

[13] Irwin, D (2017), Clashing Over Commerce, University of Chicago Press.

[14] Piazza, R, F Jaumotte, M MacDonald and J Eugster (2019), “Bilateral and

aggregate trade balances: Finding the right focus”, VoxEU.org, 10 Sep.

99
 Stock market trading volumes and economic uncertainty

dependence: before and during Sino-U.S. trade friction

Yuxin Cai

School of Management, Shanghai University, Shanghai, China; b School of

Business, University of Lausanne, Lausanne, Switzerland

100
 May 2020

ABSTRACT
This article mainly studies the interaction between the economic

uncertainty and stock market trading volumes changes before and during Sino-

U.S. trade friction using multifractal detrended fluctuation analysis (M.F.-D.F.A.)

and multifractal detrended cross correlation analysis (M.F.D.C.C.A.). Our

research aims to reveal whether the economic uncertainty increased by Sino-U.S.

trade friction affects stock market trading volume more susceptible, as well as

how policymaker strengthen risk management and maintain financial stability.

The results show that the dynamic volatility linkages between economic

uncertainty and stock market trading volumes changes are multifractal, and the

cross-correlation of volatility linkages are anti-persistent. Through the rolling-

windows analysis, we also find that the economic uncertainty and trading

volumes are anti-persistent dynamic cross-correlated. This means that while

economic uncertainty increases, trading volume decreases. Besides, Sino-U.S.

trade friction has impact on the cross-correlated behavior significantly,

101
suggesting that stock markets’ risks are relatively large and trading volumes

changes are more susceptible by economic uncertainty during Sino-U.S. trade

friction in the U.S. Our study complements existing literature about the stock

markets trading volumes and economic uncertainty dependence relationship by

multifractal theory’s methods. The overall findings imply that the increased

economic uncertainty caused by Sino-U.S. trade friction exacerbates financial

risks, which are useful for policymakers and investors.

INTRODUCTION

Capital market has always been affected by economic uncertainty. As market

sensitivity, economic uncertainty affects not only the efficiency of the stock

market but also market’s sentiment. And the direct reflection may be the

markets’ trading volume changes. This article will check the linkages between

stock market trading volumes and economic uncertainty. Moreover, the Sino-

U.S. trade friction effected capital markets’ instabilities, led to economic

uncertainty increased, so we focus on the linkages between stock market trading

volumes and economic uncertainty in two important periods: before and during

Sino-U.S. trade friction periods. As the limitation of Efficient Market Hypothesis

(E.M.H.), especially during times of uncertainty (Lo & MacKinlay, 1990;

Jegadeesh & Titman, 1993), we explore the link between stock market trading

volumes and economic uncertainty based on Fractal Market Hypothesis

(F.M.H.). F.M.H. proposed by Mandelbrot (1982) is the frontier of nonlinear

102
theory while financial market cannot be adequately addressed by using the

traditional E.M.H. Since then, many financial physics methods have been

proposed to test the dynamic relationship between two financial time series.

Peng et al. (1994) detected detrended fluctuation analysis (D.F.A.), then

Kantelhardt et al. (2002) improved on it by proposing the multifractal form of

D.F.A. (M.F.-D.F.A.). M.F.-D.F.A., also called multiscale fractal analysis, can

describe the complex characteristics of financial time series changes in the capital

market. This method became more persuasive through the generalised Hurst

exponent, generalised fractal dimension, and multifractal spectral function.

Podobnik and Stanley (2008) proposed detrended cross-correlation analysis

(D.C.C.A.) to investigate power–law cross-correlations between nonstationary

time series. Zhou (2008) then integrated D.C.C.A. into M.F.-D.F.A. to derive

multifractal detrended cross correlation analysis (M.F.-D.C.C.A.).

Numerous studies have detected the cross-correlations between two

financial series. Fleming and Kirby (2011) documented the relationship

characteristics of volume and volatility, showing a long memory of both volume

and volatility. Guedes et al. (2017) analysed how each blue-chip company is

adherent to its country index by D.C.C.A. cross-correlation coefficient. Alaoui et

al. (2019) investigated the cross-correlation between Bitcoin prices and trading

volumes, showing that Bitcoin prices changes and changes in trading volume

mutually interact in a nonlinear way. Cai and Hong (2019) explored the volatility

linkages between stock market trading volumes and investor fear gauges,

showing that cross-correlations of large fluctuations are strongly anti-persistent

in both short- and long-term. Hoque et al. (2019) showed that global economic

103
policy uncertainty exerted negative effects on the overall stockmarket. Although

existing studies have investigated on related topics, this study differentiated

itself from past studied and contributes to the literature in the following ways.

First, to the best of our knowledge, this is the first study that exams the stock

markets trading volumes and economic uncertainty dependence relationship

using multifractal theory’s methods. Unlike the study of Prior research which

examined financial markets usually by G.A.R.C.H., V.a.R., etc. based on E.M.H.

(Dyhrberg, 2016; Jens, 2017; Drobetz et al., 2018; Nilavongse et al., 2020). We

apply multifractal theory’s methods to

test the stock markets trading volumes and economic uncertainty dependence

relationship considering the increasing complexity of the capital market. Second,

after dividing sample into two important different periods: before and during

Sino-U.S. trade friction periods, we re-exam volatility linkages of four pairs of

financial time series for different periods, and then compare the multifractal

characteristics of volatility linkages for different periods to discover the impact of

the Sino-U.S. trade friction on stock market trading volumes. Third, the negative

impacts of the Sino-U.S. trade friction on stock market trading volumes provide

several implications to maintain financial stability and sustain the momentum of

stock market performances.

Since August 2017, the Office of the United States Trade Representative

(U.S.T.R.) launched the ‘301 survey’ in China. In March 2018, the U.S.T.R.

published survey results, deeming that the Chinese government had

unreasonable and discriminatory policies in measuring intellectual property

protection, which caused at least $50 billion in annual losses to the U.S. economy.

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So since April, an additional 25% tariff has been levied on certain goods

imported from China. Based on this survey, in March 2018, the U.S. government

proposed protectionist measures against China, including large-scale tariffs on

goods imported from China; the U.S.T.R. would file a lawsuit against Chinese

practices in technology, violating World Trade Organization (W.T.O.) rules

which licensing to the W.T.O.; the United States Department of Finance played

an essential role in restricting investments by Chinese enterprises, to protect

pivotal industries and technologies in the U.S. This represents the beginning of

Sino-U.S. trade friction. This friction made investors more susceptible to policy

uncertainty, as well as the capital market.

As the Sino-U.S. Trade friction has a significant influence on the capital

market, we focus on the volatility linkages between trading volume changes of

U.S. stock markets and economic uncertainty in two important periods: before

and during the SinoU.S. trade friction periods. We will test the feature of the

volatility linkage between economic uncertainty and trading volume changes of

some major stock markets (S&P500, Dow Jones Industrial Average [D.J.I.A.]) in

different periods. By using the M.F.-D.C.C.A. method, we find the characteristic

of multifractality for the cross-correlated degree between stock market trading

volume changes and economic uncertainty. Through the rolling-windows

method, the stock market trading volume and economic uncertainty dependence

are re-examined. Since then, the characteristics of the volatility linkage has

received attention based on the Sino-U.S. Trade friction. Karam and Zaki (2015)

found a positive association between real GDP and both service and goods

trading volume. The interaction term between goods and services trading

105
volumes is negative, while the effect of service trading volumes on real G.D.P. is

positive in the Middle Eastern and Northern Africa (M.E.N.A.) countries. Guo et

al. (2017) found that considerable uncertainty resulted in reduced trading

volume and higher price volatility in subsequent months through panel V.A.R.

and causality analysis. Bahmani-Oskooee et al. (2019) showed that one-third of

the commodities which account for a large share of Sino-U.S. trade were affected

by significant long-term asymmetry. Though most studies examined the linkage

between trading volume and economic factors, few studies paid attention to the

characteristic of multifractality using M.F.-D.C.C.A. based on F.M.H. in before

and during Sino-U.S. trade friction periods, respectively.

In this article, we use economic uncertainty index explored by Baker et al.

(2016). Economic uncertainty index is a weighted average of three components.

The first component quantifies the volume of news discussing policy-related

uncertainty per

month since January 1985. The second component measures the level of

uncertainty related to future changes in the tax code. This is done by using data

from the Congressional Budget Office on the tax provisions which set to expire in

the near future. Economic uncertainty index estimates the level of tax-related

uncertainty every year by the discounted value of the revenue effects of all tax

provisions which set to expire in the following 10 years. The third component

106
captures forecasters’ divergences about future monetary and fiscal policies. The

authors use the Survey of Professional Forecasters provided by the Federal

Reserve Board of Philadelphia to obtain forecasts of C.P.I., as well as purchases

of goods and services by federal, state, and local governments. Several literatures

ensured that economic uncertainty index did in fact capture aggregate policy

uncertainty and equity market uncertainty (Gulen & Ion, 2016; Nguyen & Phan,

2017; Drobetz et al., 2018; Junttila & Vataja, 2018, Nguyen & Nguyen, 2019).

We put forward the research question on reveal whether the increased

economic uncertainty caused by Sino-U.S. trade friction affects stock market

trading volumes more susceptible, more irregular and disordered, as well as

whether the increased economic uncertainty exacerbates financial risks. The key

finding is useful for policymakers and investors. The basic framework of this

study is shown in Figure 1. The rest of the article is organised as follows. Section

2 introduces the methodology. Section 3 describes the data to be used. Section 4

reports the analysis results. Section 5 concludes the article.

METHODOLOGY

Multifractal theory provides powerful tools to understand the complex nonlinear

nature of time series In diverse field. Inspired by its striking analogy with

hydrodynamic turbulence, from which the idea of multifractality originated,

multifractal theory of financial markets has bloomed, forming one of the main

directions of tectonophysics. To explore the volatility linkages between stock

market trading volume changes and economic uncertainty, we apply some

107
methods of multifractal theory to conduct a more essential analysis. D.C.C.A.

and M.F.-D.C.C.A. methods can be expressed as follows.

Step 1. Imagine two time series x(t) and y(t)(t ¼ 1, 2, … , N), where N is the equal

length of these two series. The ‘profile of each series is then determined as

follows:

Step 2. The two series x(t)and y(t) are divided into Ns¼ [N=s] non-overlapping

segments of the same length s. Since the length N of the series is not always a

multiple of the considered time scale s, a small part of the profile (1) may remain.

To ensure that the complete information can be guaranteed in the time series, the

same procedure is repeated starting from the opposite of the two series x(t) and

y(t): Thus, 2Ns segments are obtained together

Step 3. Define the local trends from an mth-order polynomial fit:

Step 4. Calculate the local trends for each 2Ns segment by an mth-order

polynomial fit. The detrended covariance is determined by

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For each segment k, k ¼ Ns þ 1, Ns þ 2, ... , 2Ns: X(t) and Y(t) are the fitting

polynomial of each profile with order m in segment k, which is also referred to as

M.F.-D.C.C.A.-m.

Step 5. Obtain the qth order fluctuation function from averaging all segments k,

Step 6. Analyse the scaling behaviour of the fluctuation function by observing the

log-log plot Fq (s) against each value of q. If the two series x(t) and y(t) are long-

range cross-correlated, we can derive that Fq (s) Þ has large values of s. Thus, a

power–law relationship can be expressed as follows:

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110
 DATA
We use daily S&P500 D.J.I.A stock market trading volume changes and

economic uncertainty, containing economic policy uncertainty (EPU) and equity

market uncertainty (EMU). The full sample data covered the period from 2

January 2009 to 31 October 2019, and each series contains 2547 observations. We

started in 2009 because the financial crisis effected mostly past. In order to

explore the differences ofthe linkages between stock market trading volume

changes and economic uncertainty before and during Sino-U.S. trade friction, we

divide the full sample into two important sub-periods: Before-period denotesthe

before-trade friction from 2 January 2009 to 31 December 2016, and during

period denotesthe during-trade friction from 2 January 2017 to 31 October 2019.

The original data were derived from the Economic Policy Uncertainty website

and Wind Data Services. Based on trading volume logarithmic changes

measured by Podobnik et al. (2009), we set stock markets trading volume

changes as follows:

Where VOLt is the daily trading volume of each stock market. We set

daily changes in EPU and EMU as follows:

Where EU denotes EPU or EMU, respectively. The descriptive statistic

results for DVOLt and DEUt are illustrated in Table 1. Table 1 shows the

descriptive statistics of daily trading volume changes of D.J.I.A., S&P500 and

daily EPU changes, daily EMU changes. Each index of the mean value is close to

zero, and each standard deviation is larger than zero. The Jarque-Bera statistical

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test shows the rejection of the null hypothesis of normality at the 5% significance

level. Besides, the A.D.F. test shows the stationarity of daily EPU changes, daily

EMU changes and daily trading volume changes of two kinds of stock markets.

Trading volume changes and economic uncertainty demonstrate the clusters of

small and large

fluctuations.

EMPIRICAL RESULTS

The DCCA coefficient is a method to investigate how the coefficient varies with different time scales.
Then Reboredo et al. (2014), Wang et al. (2017) adopt the D.F.A. to quantify the level of dynamic
relationship between two different financial series. The coefficient PDCCA is expressed as follows:

Where F2 DCCAðsÞ 、 FDFA1 sð ÞFDFA2ðsÞ are calculated using Eqs. (4, 5)

while q ¼ 2, polynomial order m ¼ 1 in this article. The value of qDCCA ranges

from 1 to 1. If qDCCA ¼ 0, there is no cross-correlation between the two time

series. If qDCCA 6¼ 0, it is shown the existence of cross-correlation between

thetwo time series. Different values of qDCCA based on different values of

window size s are shown in

Figure 2.

As seen in Figure 2, with each different s (8 s N=4), the values of D.C.C.A.

coefficient qDCCA of DDJIA(DSP500)- DEPU are all within the range from 1 to

0, and qDCCA of DDJIA(DSP500)- DEMU are all within the range from 0 to 1.

Because of the finite size of time series, even if there is no cross correlation,

qDCCA is not equal to 0. This cross-correlation coefficient test is used to show

the existence of cross correlation. Therefore, in order to find out whether the

cross-correlation is long-range or anti-correlation, the D.C.C.A. method and its

variants are needed to apply in our study.

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4.2. Volatility linkages across time using M.F.-D.C.C.A. analysis

In order to further observe the volatility linkages between trading volume

changes of stock markets and economic uncertainty, we adopt the M.F.-D.C.C.A.

to model the scaling behaviour of volatility crosscorrelation between different

time series in a quantitative way using the full period, before and during the

Sino-U.S. trade friction periods, respectively. From Eqs. (1–9), we set 10 q 10, 8 s

N=4,polynomial order m ¼ 1, and calculate the slope of the fluctuation function

Fq sð Þ by ordinary leastsquares to obtain the Hurst exponents, the cross-

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correlations between daily trading volume changes of stock markets and daily

changes economic uncertainty for the full sample and sub-samplesare shown in

Table 2

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115
116
117
118
 It shows that the strongest multifractal characteristics time is the during-

trade friction period, this is the further evidence of what we have previously

obtained that the cross-correlated is more susceptible to each other during the

Sino-U.S. trade friction. The Sino-U.S. trade friction increases economic

uncertainty, more irregular and more disordered volatility linkage lead to

ineffective to predict the future, so stock market risks are relatively higher for the

during-trade friction period than the before-trade friction period.

4.3. Volatility linkages across time using rolling-window analysis

The rolling-windows method is often used to further investigate the volatility

linkage between two financial time series. The windows length can be adjusted

to suitable segments that fit the research needs. Inoue et al. (2017) used

macroeconomic time series to provide evidence that the choice of estimated

window size is sensitive and proposed that an optimal size should be used for

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forecasting. Cai and Hong (2019) set the length of each window at approximately

one year to research the cross-correlations between crude oil and investor fear

gauges. We fix the length of each window at 230 that each stock market with

business days (approximately one year), set the rolling step as one day, and

calculate the scaling exponents for the four pairs of series in each window when

q ¼ 2. The results are shown in Figure 5.

Figure 5 show that all scaling exponents are less than 0.5, indicating the

strong anti-persistent cross-correlations between daily stock markets trading

volume changes and economic uncertainty. The scaling exponents are almost the

smallest value during the trade friction, showing the strongest multifractal

characteristics of volatility linkages between trading volumes and economic

uncertainty for the during-trade friction period. That means during the Sino-U.S.

trade friction, stock market trading volumes are significantly affected by

economic uncertainty more strongly. The Sino-U.S. trade

friction indeed makes the future economic situation more complicated.

5. Conclusion

In this article, the volatility linkages between stock markets trading volume

changes and economic uncertainty movements are investigated using D.C.C.A.

and M.F.- D.C.C.A. analyses. The main findings of the study are as follows. First,

the empirical results show that the volatility linkages between daily stock

markets trading volume

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121
financial stability. For example, policymakers can provide investment incentives

to boost investors ‘participations in the capital market, establish a stability capital

market fund by benchmarking it to a certain safety level, reduce trade imbalance,

etc. These are all useful to avoid financial markets’ systemic risks.

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 CONCLUSION
Summary of Findings (based on Related Literature)

The main purpose of this paper was to analyze the effects of the ongoing trade war
tension between the United State and China on international trade, especially on international
trade, supply chain, stock market and economic uncertainties. The paper used data from various
sources and employed methods to measure the impact of trade war on international trade flow,
disruptions on the supply chain, volatility if the stock market and global economy uncertainties.
The paper found that:

 The Us-China trade war emphasize the potential impact of the US-China trade war on global
economic stability. Rising tension between the two economic powerhouses have the
potential to disrupt international trade flows, supply chains, and investment patterns,
affecting the broader global economy.

 The Us-China trade war affecting the imposition of tariffs on imports prices resulting to
higher prices for consumers and producers. And other consequences including impacts on
employment and regional economies, suggest that trade disputes can disrupt existing supply
chains. The disruption affects the low of goods, production processes, and the geographical
distribution of economic activity. The paper emphasizes the importance of trade policy
decisions and negotiations.

 The Us-China trade war led to trade diversions. with many countries increasing their exports
to the US and globally. This paper suggests that trade disputes can create new trade
opportunities for certain countries, potentially reshaping global trade patterns.

 The US-China trade war significantly affects the cross-correlated behavior, suggesting that
stock markets' risks are relatively large and trading volume changes are more susceptible to
economic uncertainty during the period. This paper assessed the complex and multifaceted
nature of the relationship between economic uncertainty and stock market trading volumes
can inform policymakers and investors in managing financial risks and maintaining stability
in the economy.

 The paper also discussed the importance of roundtable negotiations and the redefinition of
trade agreements to promote more liberal trade flows. The paper suggests that the findings
may influence the approach to future trade negotiations and agreements, with an emphasis on
addressing underlying tensions and promoting a more cooperative international trade
environment.

127
 Recommendations

Base on the findings of this paper, which showed that the US-China trade war caused economic
pain on both sides of United states and China. The following recommendation are suggested for
investors, traders and policy makers

 Investors should always have risk management plan to show them their project’s data to
assess and decide on their investments to prevent a lot of loss on their funding.

 Traders should search for alternative sources to their supplies, transportation, alternative
production process, for them to be independent and be ready to any kind of situation
economically, financially and culturally.

 Policy makers should always willing to innovate or adopt changes in the economy,
support equality and fairness, create rules and plans for the traders to follow, identify
problem and implement rules to prevent conflicts that can affect the peace in trading

128
 Reflections and Realizations

While writing this paper has been really inspirational and challenging to us. We learned a
lot from this research about US and China Trade war and how it effects on global trade. This
research also improves our capabilities and skills to analyzing, referencing, and researching. We
used the internet to search for different sources, pages, journals, papers to support our research.

One of the main challenges of our research is to find the best article or journal for the
topic we chose, because some sources are just too long and broad for the topic that confuse and
lead us to different topics. We always consider that the sources should be aligned with the topic
that we have.
One of the realizations we had is findings may influence the approach to future trade
negotiations and agreements. Conflict can affect trading not just by the two countries but
globally, it also affects trade opportunities to other countries, and affect specially employment or
unemployment to people.

For that reason, this conflict should be resolved and be observed that can happen to any
country and can be an example to everyone to avoid this kind of risk in their business specially
trading. To promote understanding and awareness to other trading countries. We believe that this
research can improved better for future reference and supports other research as well as the
previous sources we read.

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mUIdH5qNQ

https://www.scirp.org/journal/paperinformation?
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mUIdH5qNQ

https://www.scirp.org/journal/paperinformation?paperid=117976

https://cepr.org/voxeu/columns/bystander-effect-us-china-trade-war#:~:text=The%20US
%2DChina%20trade%20conflict%20opened%20doors%20for%20bystander
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