As the Sino-US trade war approaches its fourth year, there is ample evidence to show that both sides were injured by protectionist measures. But far from the end of globalization spells out, the conflict may have laid the foundation for an even stronger world trade system.
NEW HAVEN – The trade war between the United States and China began in 2018 and is not officially over. So which side “won”? Recent research offers an unequivocal answer: no. U.S. tariffs on Chinese products led to higher import prices in the United States in affected product categories, and China’s retaliatory tariffs on U.S. products ultimately harmed Chinese importers.
Bilateral trade between the two countries has gained momentum, and because the United States and China are the world’s two largest economies, many see this development as announcing the end of globalization.
However, the “deglobalization” argument ignores the many “bystanders” countries that have not been directly attacked by the US or China. In a new study examining the effects of the trade war on these countries, I and my co-authors come to an unexpected conclusion: Many, but not all, of these bystander countries have benefited from the trade war in the form of increased exports.
One would probably expect that exports from third countries (Mexico, Vietnam, Malaysia, etc.) would take the place of Chinese exports to the United States. But what is surprising is that these countries have not only increased their exports to the United States but also to the rest of the world. of the world. In fact, world trade in products affected by the trade war apparently increased by 3% relative to world trade in non-tariff products. This means that the trade war not only led to the reallocation of exports from third countries to the United States (or China); it also led to net trade creation.
Since trade wars are generally not associated with this outcome, what is responsible for it? One possible explanation is that some countries have gone from spectators of the trade war to see the situation as an opportunity to increase their presence on world markets. By investing in additional trading capacity or mobilizing existing spare capacity, they can increase their exports without increasing their prices.
Another explanation is that as bystander countries began to export more to the United States or China, their unit cost of production decreased because economies of scale allowed them to offer more products at lower prices. Consistent with these explanations, our newspaper finds that the countries with the largest increases in global exports are those where export prices fall.
While the net effect of the trade war on the world economy was an increase in trade, there was great variation between countries. Some countries have significantly increased their exports; some increased their exports to the United States at the expense of their exports elsewhere (they reallocated trade); and some countries simply lost exports by selling less to the United States and the rest of the world. What explains these differences, and what could countries have done to ensure greater gains from the trade war?
Again, the answers are somewhat surprising. One could guess that the most important factor explaining the different experiences of countries would be the patterns of specialization before the trade war. Countries such as Malaysia and Vietnam, for example, were fortunate enough to produce a product category that was hit hard, such as machinery. Yet patterns of specialization seem to have mattered little, judging by the trade war’s major export winners: South Africa, Turkey, Egypt, Romania, Mexico, Singapore, the Netherlands, Belgium, Hungary, Poland, Slovakia, and the United States. Czech Republic.
Instead, what mattered were two key characteristics of the country: participation in “deep” trade agreements (defined as regimes that cover not only tariffs but also other cross-border protection measures); and cumulative foreign direct investment. Countries with a pre-existing high degree of international trade integration have benefited the most. Trade agreements tend to reduce the fixed cost of expansion in foreign markets, and existing agreements may have offset some of the uncertainty generated by the trade war. Similarly, higher FDI is a reliable indicator of stronger social, political and economic ties with foreign markets.
Supply chain effects may also have played a role. In a preconceived policy mandate based on private talks with executives of large multinational corporations, analysts at the Peterson Institute for International Economics in 2016 predicted that U.S. tariffs would “cause a chain of production shifts.”
Should a company decide to move the production of a product subject to Chinese tariffs to a third country, it would require a reorganization of other activities in the third country, which in turn would affect many other countries. The exact pattern of these responses would have been difficult to predict given the complexity of modern supply chains. But the degree of international integration of a country was apparently a decisive factor in a company’s relocation decisions.
So, going back to our initial question, the big winner of the trade war appears to be the “bystanders” countries with deep international ties. From the American perspective, the trade war did not lead to the announced reorientation of economic activity, at least in the short and medium term. Instead, Chinese imports to the United States were simply replaced by imports from other countries.
From the perspective of the “bystanders” countries, the trade war ironically demonstrated the importance of trade integration, especially deep trade transactions and FDI. Fortunately, the Sino-US trade war does not mean the end of globalization. Rather, it could usher in a new world trade system that no longer has the United States or China in the middle.
The author
Former World Bank Group economist and editor-in-chief of the American Economic Review, she is a professor of economics at Yale University.
Reference-www.eleconomista.com.mx