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Pinelopi Koujianou Goldberg shows that while the two main parties, China and the US, have both lost, 'bystander' countries have gained

Public Policy / opinion
Pinelopi Koujianou Goldberg shows that while the two main parties, China and the US, have both lost, 'bystander' countries have gained
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The United States-China trade war started in 2018 and has never officially ended. So, which side has been “winning” it? Recent research offers an unambiguous answer: neither. US tariffs on Chinese goods led to higher import prices in the US in the affected product categories, and China’s retaliatory tariffs on US goods ended up hurting Chinese importers. Bilateral trade between the two countries has tanked. And because the US and China are the world’s two largest economies, many regard this development as a harbinger of the end of globalisation.

Yet the “deglobalisation” argument ignores the many “bystander” countries that were not directly targeted by the US or China. In a new paper investigating the effects of the trade war on these countries, my co-authors and I come to an unexpected conclusion: Many, but not all, of these bystander countries have benefited from the trade war in the form of higher exports.

To be sure, one would expect exports from third countries (Mexico, Vietnam, Malaysia, etc.) to take the place of Chinese exports to the US. But what is surprising is that these countries increased their exports not only to the US but also to the rest of the world. In fact, global trade in the products affected by the trade war seems to have increased by 3% relative to global trade in the products not targeted by tariffs. That means the trade war did not just lead to reallocation of third-country exports to the US (or China); it also resulted in net trade creation.

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

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

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

Again, the answers are somewhat surprising. One might have guessed that the most important factor explaining countries’ differing experiences would be pre-trade-war specialisation patterns. Countries such as Malaysia and Vietnam, for example, were lucky to be producing a heavily affected product category like machinery. Yet specialisation patterns appear to have mattered little, judging by the big export winners of the trade war: South Africa, Turkey, Egypt, Romania, Mexico, Singapore, the Netherlands, Belgium, Hungary, Poland, Slovakia, and the Czech Republic.

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

Supply-chain effects also may have played an important role. In a prescient policy briefing based on private conversations with executives at large multinationals, analysts at the Peterson Institute for International Economics predicted in 2016 that US tariffs would “set off a daisy chain of production shifts.”

If a company decided to shift production of a product targeted by Chinese tariffs to a third country, this would necessitate a reshuffling of other activities in the third country, affecting multiple other countries in turn. The exact pattern of these responses would have been hard to predict, given the complexity of modern supply chains. But a country’s degree of international integration appears to have been a decisive factor in a firm’s relocation decisions.

Returning to our initial question, then, the big winner of the trade war seems to be “bystander” countries with deep international ties. From the US perspective, the trade war did not lead to the advertised reshoring of economic activity, at least in the short to medium term. Instead, Chinese imports to the US were simply replaced by imports from other countries.

From the perspective of “bystander” countries, the trade war, ironically, demonstrated the importance of trade integration, especially deep trade agreements and FDI. Fortunately, the Sino-American trade war does not spell the end of globalisation. Rather, it may mark the beginning of a new world trading system that no longer has the US or China at its center.


Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is Professor of Economics at Yale University. Copyright: Project Syndicate, 2022, published here with permission.

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3 Comments

I suspect businesses across the world are seeing risks in reliance on china, and diversifying supply lines.

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yep, vertical integration is on the way back.

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 From the US perspective, the trade war did not lead to the advertised reshoring of economic activity, at least in the short to medium term.

Indeed, and entirely contrary to the claims of Trump. 

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