Illustration of US-China trade war
Illustration of US-China trade war
Although US tariffs on Chinese exports were intended to support domestic industries, evidence suggests that the tariff burden may have fallen largely on US consumers, as opposed to Chinese exporters. Chinese exporters also experienced a decline in demand from the US due to the tariffs, while facing constraints in shifting their sales to alternative markets or the domestic market.
Studying China’s response to the US-China trade war
The 2018 US-China trade war marked a significant departure from decades of global trade liberalisation, as the US imposed successive waves of tariffs on Chinese goods. This protectionist shift disrupted bilateral trade flows and forced Chinese exporters to adapt to sudden market shocks. We study how Chinese firms responded to these challenges, analysing adjustments in export pricing, sales redistribution across markets, and structural barriers to adaptation (Jiao et al. 2024). Our findings reveal critical insights into the resilience and vulnerabilities of export-dependent economies in an era of escalating trade barriers.
Our study leverages transaction-level export data from a Chinese city, encompassing daily records of exports at the Harmonized System 10-digit product level from January 2013 to April 2019. This data was representative of China’s national trends in exports and merged with monthly firm-level domestic sales, offering an invaluable opportunity to track both international and domestic market responses. Complementing this quantitative analysis, a survey of 600 exporting firms provided qualitative insights into managerial decision-making and adjustment challenges.
The tariffs have been borne by US consumers rather than Chinese exporters
One of the study’s most striking findings is the complete pass-through of US tariffs to American consumers, consistent with findings using US data (Amiti et al. 2019, Fajgelbaum et al. 2020, Cavallo et al. 2021). Despite tariff hikes of up to 25 percentage points on US$250 billion worth of Chinese goods, Chinese exporters maintained stable free-on-board prices. This contradicts traditional expectations that exporters may absorb tariff costs to retain market share.
Robustness checks controlling for firm entry, exit, and product heterogeneity confirmed the robustness of this phenomenon. Survey responses clarified the rationale behind this rigidity: 72.2% of firms cited critically low profit margins as a barrier to price reductions, while 21.1% highlighted contractual obligations that locked in pricing terms. These findings align with the broader evidence base on tariff incidence, underscoring how profit constraints and contractual rigidities can amplify the burden of protectionist policies on importing nations.
The US-China trade war had limited redistributive effects on global markets
The trade war triggered significant redistributive effects across markets. Exports to the US plummeted, with a 1% increase in firm-level tariffs correlating with a 1.65% decline in export volumes. This contraction was partially offset by a modest 0.87% rise in exports to the EU. The EU emerged as a partial substitute for the US market, a shift attributable to its comparable economic scale and shared demand for overlapping product categories. By contrast, exports to Southeast Asia, Japan, Korea, and China’s domestic market showed negligible adjustments. Furthermore, Chinese exporters severely affected by US tariffs did not achieve meaningful growth in domestic sales.
Our study’s survey component underscores structural impediments to market reallocation. Firms faced multiple barriers when expanding into non-US foreign markets: 59.3% cited underdeveloped sales networks, 25.3% identified brand recognition and market size limitations, 25% raised payment default concerns, and 22.9% highlighted divergent product standards. Domestic market efforts faced analogous hurdles but diverged in intensity; sales channel challenges were less acute (46.6%), yet payment defaults (28.9%) and regulatory mismatches (28.3%) emerged as more pronounced obstacles compared to international ventures.
Profits also significantly plummeted as a result of the trade war. Chinese exporters’ firm-level profit margins declined by 0.35 percentage points for every 1% increase in tariff-inclusive prices. This erosion may reflect the pressures of fixed operational costs and shrinking sales volumes on Chinese exporters.
The policy implications of protectionism
The US-China trade war exposed both the resilience and fragility of Chinese exporters. While firms were able to maintain prices, their capacity to reallocate sales was constrained by structural barriers. These findings underscore the importance of addressing non-tariff barriers, such as product standardisation and market access. For policymakers, our findings serve as a cautionary tale: protectionist measures may partially achieve their aims by hurting partner countries’ exporters, but they risk amplifying costs for their own consumers.
References
Amiti, M., Redding, S. J. and Weinstein, D. E. (2019). "The impact of the 2018 tariffs on prices and welfare." Journal of Economic Perspectives, 33(4): 187–210.
Cavallo, A., Gopinath, G., Neiman, B. and Tang, J. (2021). "Tariff passthrough at the border and at the store: Evidence from US trade policy." American Economic Review: Insights, 3(1): 19–34.
Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J. and Khandelwal, A. K. (2020). "The return to protectionism." The Quarterly Journal of Economics, 135(1): 1–55.
Jiao, Y., Liu, Z., Tian, Z. and Wang, X. (2024). "The impacts of the US trade war on Chinese exporters." Review of Economics and Statistics, 106(6): 1576–1587.