Global impacts of China–US trade tensions

Abstract

This paper studies the economic impacts of China–US trade tensions. A global value chains-augmented global vector autoregressive trade model that gauges the spatial and temporal dynamics of international transmission of economy-specific trade policy shock across economies is employed. Trade tensions are found to have both real and financial effects on individual economies. Results lend support to the thesis that international trade is a positive-sum game in the world trading system characterized by global value chains. The US restrictive trade policy is counter-productive to the US economy by worsening its trade imbalances. Redirection of investment from China may be limited given the contemporary world economy characterized by global value chain production networks. Economies from different regional economic groups and with different trade balance positions are heterogeneously affected. As a whole, trade protectionism is detrimental to the economic well-being of the world economy by shrinking international trade, reducing output, curbing investment and plummeting stock prices.

KEYWORDS:

• China–US relation
• global imbalances
• global value chains
• global vector autoregression
• trade tensions

JEL Classifications:

• C32
• F13
• F14
• F42
• F51

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 See Lu (2018) for an overview of the China–US trade disputes.

2 We thank two anonymous referees for pinpointing the specifics of the research questions under study.

Additional information

Funding

This work was supported by the Research Committee, University of Macau [grant number MYRG2017-00215-FBA].