China’s Retaliatory Tariffs against the US: Firm Import-Export Linkage along Global Production Line

Abstract

This paper finds an incomplete pass-through of China’s retaliatory tariffs against American products at the firm level during the US-China trade war period (2016-2019). The tariffs also lead to a decrease in exports to other countries. These two novel findings, incomplete pass-through and insignificant trade diversion effects, are due to tariffs’ accumulation effects via the global supply chains. Particularly, the dampening effects in exports are more pronounced with the length of global supply chain. Furthermore, an extensive search on vertical spillover effects suggests that increasing sourcing costs in downstream sectors overweight domestic substitution and reduce the demand from upstream sectors.