(Working) Job Market Paper
“Building Walls and Building Blocs: The Two-Tale Story of the 2017-2019 U.S.-China Trade War” (with Peri da Silva)
Abstract: We employ a product-level gravity model of international trade to understand the effects of global trade policy changes during the First Trump administration. In doing so, our flexible model controls not only the tariffs applied by the U.S. and China but also the retaliatory tariffs applied against the U.S. and those applied between other countries. Among the policy changes, we control for variables identified in the literature to measure relative market access, including the level of tariffs faced by an exporter in alternative destinations and the level faced by other exporters in the same destination. Our results confirm the adverse effects of the trade war on trade flows between the U.S. and China. However, it highlights the relevant negative role played by retaliatory tariffs on U.S. exports and the positive role of tariff policy changes across other countries in promoting their trade. Besides, these results confirm that relative market access is essential in understanding otherwise bilateral trade relationships. Our predicted trade flows show that the rest of the world and China countered the de-globalization (building walls) trend initiated under the first Trump administration by reinforcing their links (building blocs), including using numerous preferential trade agreements (PTAs). The net effect of both initiatives is a decline in global trade, driven by the role of retaliatory tariffs on U.S. exports and the impact of relative market access controls.