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United States-China Trade Relationships

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PST)

Manchester Grand Hyatt, Cortez Hills C
Hosted By: Chinese Economic Association in North America
  • Chair: Heiwai Tang, Johns Hopkins University and Hong Kong University

Quantifying the United States-China Trade Conflicts

Jiandong Ju
,
Tsinghua University
Hong Ma
,
Tsinghua University
Zi Wang
,
Shanghai University of Finance and Economics
Xiaodong Zhu
,
Toronto University

Abstract

We provide a quantitative estimation of the impacts of the protectionism tariffs recently imposed by the Trump administration. We first build a quantifiable general equilibrium model that incorporates salient features of high-tech industries. These high-tech industries (1) are more skill- intensive; (2) use more skill-intensive inputs; (3) exhibit strong external economy of scale; and (4) can hardly been substituted in producing other goods. Second, we propose a structural decomposition of welfare gains from trade which includes four parts: gains from being able to consume foreign goods; gains from changes in intermediate inputs prices; gains from changes in sectoral size; and finally gains from changes in the composition of skilled and unskilled labor. We calibrate the model to 7 major economies and 95 disaggregated industries in 2016 and consider the impact of the Trump tariffs on $200 billion Chinese imports. We find both countries lose from the Trump tariffs, where high-tech industries are disproportionately affected. China mainly loses from the decline in the production scale of its high-tech industries, while the US mainly lose from the increasing input prices used in its high-tech industries. In addition, Japan also loses from the Trump tariff due to higher input prices.

Structural Change and Global Trade

Logan Lewis
,
Federal Reserve Board
Ryan Monarch
,
Federal Reserve Board
Michael Sposi
,
Southern Methodist University and Federal Reserve Bank of Dallas
Jing Zhang
,
Federal Reserve Bank of Chicago

Abstract

Services, which are less traded than goods, rose from 58 percent of world expenditure in 1970 to 79 percent in 2015. In a trade model featuring nonhomothetic preferences and input- output linkages, we find that such structural change has restrained the growth in world trade to GDP by 16 percentage points over this period. This magnitude is similar to how much declining trade costs have boosted openness. Moreover, structural change dampens the measured gains from trade by incorporating endogenous responses of expenditure shares to the trade regime. Ongoing structural change implies declining openness, even absent rising protectionism.

Input Trade and Policy Uncertainty: Theory and Evidence from Chinese Firms

Kyle Handley
,
University of Michigan
Nuno Limao
,
University of Maryland
Rodney Ludema
,
Georgetown University
Zhi Yu
,
Renmin University of China

Abstract

We develop a theoretical model for understanding the behavior of heterogeneous firms that combine imported inputs to produce final products. Firms are subject to uncertainty in input tariffs and must pay sunk costs in order to incorporate new imported inputs in their production process. The combination of sunk cost investments and uncertainty over the price of inputs generates an option value of waiting. Thus, as uncertainty falls firms will import additional inputs. We use Chinese transactions-level trade data from 2000-2006 to examine how the trade policy commitment of WTO entry impacted Chinese imports, especially imports of intermediate inputs, at both the product and firm levels. We use several measures of the Chinese tariff threat on imported inputs, the main one being a theory-consistent function of the gap between the applied tariff and a threat tariff, given by either a mean in the pre-2000 period or the historical maximum tariff dating back to 1992 in each HS-6 category. Across product-years, product-country-years and firm-product-years, we find that the Chinese tariff threat depresses Chinese imports prior to WTO entry relative to the post-2001 period, controlling for tariff levels and numerous fixed effects. As predicted by the model the elasticity of imports with respect to applied tariffs increases substantially as changes in these are less likely to be perceived as temporary given WTO commitments.

Using Equity Market Reactions to Infer Exposure to Trade Liberalization

Andrew Greenland
,
Elon University
Mihai Ion
,
University of Arizona
John Lopresti
,
College of William and Mary
Peter K. Schott
,
NBER and Yale University

Abstract

We propose using average abnormal equity returns (AAR) to identify firm sensitivity to trade liberalization. This approach captures the net impact of all avenues of exposure and yields estimates for both goods-producing and service firms, provided they are publicly traded. Applying our method to a specific change in US trade policy, we find that AARs vary substantially across firms within narrowly defined industries and that they are correlated with, but provide explanatory power beyond, standard measures of import competition in predicting firm outcomes.
Discussant(s)
Fernando Parro
,
Pennsylvania State University
Steffan H. Qi
,
Hong Kong Baptist University
Deborah Swenson
,
University of California-Davis
Colin Hottman
,
Federal Reserve Board
JEL Classifications
  • F1 - Trade
  • F4 - Macroeconomic Aspects of International Trade and Finance