Essays on the Trade War, Processing Trade, and Global Value Chains

From 2018 to 2020, the trade war between the United States and China significantly raised trade barriers between the two largest economies in the world. My dissertation examines the economic consequences of the trade war, focusing on China's retaliation, and takes into account the presence of processing trade and global value chains. Whereas many recent studies have documented the effects of the trade war on the U.S. economy, less is known about the impacts on China. Notably, approximately 40% of Chinese imports are processing imports of intermediate inputs used in export-oriented products—which pay zero tariffs, even during the trade war.

In Chapter 1, I provide an overview of the trade war and its background, as well as a summary of efforts to assess its economic impacts. I discuss what we have learned to date from both the U.S. and China's perspective, focusing on three central topics: (i) tariff pass-through and trade elasticity, (ii) trade diversion and the role of global supply chains, and (iii) welfare impacts. I also emphasize the importance of considering processing trade and China's duty-free policy on processing imports empirically and quantitatively.

In Chapter 2, I conduct an empirical analysis of the impact of Chinese retaliation on China's import quantities and prices, highlighting the different effects on processing and non-processing trade. I do so by using monthly Chinese customs data from 2017 to 2019. I find significant reductions in non-processing imports from the U.S., whereas there is no significant effect on processing imports. This suggests that China's duty-free policy on processing trade may have served as a built-in mechanism to better protect domestic firms from damage by the trade war through the global value chain channel.

In Chapter 3, I build and calibrate a quantitative trade model that incorporates China's duty-free policy on processing imports to quantify the welfare and trade effects of the trade war. The model shows that the duty-free policy reduced China's welfare loss by 44%, and that China's imports and exports would have decreased significantly more if processing imports had not been exempted from the tariffs. These changes primarily affect industries in which processing trade is prevalent, and the model also shows considerable spillover effects on U.S. sectoral outcomes.