Friends like this: The impact of the US–China trade war on global value chains

• Date: 01 July 2020
• Author: Haiou Mao,Holger Görg
• Published date: 01 July 2020
• DOI: http://doi.org/10.1111/twec.12967

1776

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World Econ. 2020;43:1776–1791.

wileyonlinelibrary.com/journal/twec

Received: 11 July 2019

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Revised: 6 April 2020

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Accepted: 28 April 2020

DOI: 10.1111/twec.12967

ORIGINAL ARTICLE

Friends like this: The impact of the US–China trade

war on global value chains

HaiouMao1,2

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HolgerGörg2

1Wuhan University, Wuhan, China

2Kiel Centre for Globalization, Kiel, Germany

Funding information

China Ministry of Education; Leibniz Association, Grant/Award Number: 4103-413100001 and 18JZD034; National Natural

Science Foundation of China, Grant/Award Number: GZ and 1535; Wuhan University

KEYWORDS

cumulative tariffs, indirect tariffs, trade war

1

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INTRODUCTION

The ongoing ‘trade war’ between the United States and China, where both countries hike up tariffs

on clearly specified products, has been a subject of controversial public and political discussion even

since before it started. The contention among US government officials is, of course, that this will ben-

efit the United States, if not in the short then in the long run. This view of the world is, however, de-

bated strongly by academic economists. Amiti, Redding, and Weinstein (2019) for example estimate

that the changes in US trade policy have led to higher domestic prices for US consumers and an overall

reduction in US welfare. Balistreri, Bohringer, and Rutherford (2018) reach a similar conclusion, as

do Li, He, and Lin (2018) and Bellora and Fontagne (2019). These studies mirror a more general lit-

erature on the costs of protectionism, such as Ossa (2014), Costinot and Rodriguez-Clare (2014) and

Felbermayr, Jund, and Larch (2015).

This short paper contributes to this literature by considering the indirect impact tariff increases

between the United States and China can have on third countries through links in global supply chains.

Consider Apple's iPhone, which relies heavily on imported inputs from China. If the US imports this

product at higher tariffs, this increase will also feed into, say, exports of iPhones from the United

States to Canada. We calculate the implications for third countries, say Canada, using the concept of

cumulative and indirect tariffs in global value chains, as espoused in Rouzet and Miroudot (2013). The

basic idea is that imposition of higher tariffs by the United States on Chinese imports, which are then

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction

in any medium, provided the original work is properly cited.

© 2020 The Authors. The World Economy published by John Wiley & Sons Ltd.

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MAO And GÖRG

used in the United States for production and subsequent further exporting to other countries, imposes

an additional tariff cost for third countries. They, probably unintentionally, get hurt through this.

Ours is, to the best of our knowledge, the first attempt to apply these concepts of cumulative and in-

direct tariffs in the context of the US–China trade war. While other studies have also looked at the impact

on third countries, they usually consider trade diversion which may benefit other trade partners (e.g.,

Balistreri et al., 2018; Bolt, Mavromatis, & van Wijnbergen,2019). The idea that the tariff increase will

feed through the global supply chain also into exports to third countries is largely unexplored.1

We combine data from input–output relationships, imports and tariffs, to calculate the impact of

the tariff increases by both the United States and China on cumulative tariffs paid by third countries.

We show that the tariff hikes increase cumulative tariffs for other countries and thus hurt trade part-

ners further downstream in global supply chains. We also show that this is particularly important for

tariff increases on Chinese imports in the United States. These are likely to be used as intermediates

in the United States, which are then re-exported to third countries. Interestingly, the most heavily hit

third countries are the closest trade partners, namely the EU, Canada and Mexico. We estimate the

tariffs impose an additional burden of between 500 million to 1 billion US dollars on these countries.

China's tariffs on US imports have less of an effect, as they are less likely to be re-exported.

Section 2 outlines our methodology. Section 3 describes the data sets. The results of our calcula-

tions are presented and discussed in Section 4, while Section 5 concludes.

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METHODOLOGY

A cumulative tariff is the total cost of all tariffs incurred in a production process along the global value

chain. It provides evidence on the extent to which trade costs are magnified in international production

networks (Rouzet & Miroudot,2013). Based on the calculation of cumulative tariffs, the extra tariff

burden on third countries caused by tariff adding between two trading partners can be estimated. This

is referred to as the indirect tariff burden. In other words, the indirect tariff burden can show clearly

how much a third country gets hurt by tariff hikes between two countries.

2.1

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Cumulative tariff

We use the method developed by Rouzet and Miroudot (2013) to calculate the cumulative tariff on

imports. The cumulative tariff consists of two parts, namely a direct tariff and an indirect tariff. The

calculation of a cumulative tariff can be described as follows, in which we first ignore the dimension

of industries for the sake of simplicity:

• Stage 0: the direct tariff ti,j is imposed by country j on country i.

• Stage 1: for country i producing per unit output, it imports am,i from country m as intermediate

input,

m∈(1,2 …N)

. Then the cumulative tariff of country j's import from country i for stage 1 is

1There are, of course, important antecedents to this way of evaluating second order effects of tariff changes, in particular in

the literature on effective rate of protection (ERP), see, for example, Greenaway and Milner (2003), Krueger etal.(1980) and

Corden (1966). One of the important insights of this literature is that it is important to look at the entire tariff structure in

order to evaluate their effects. This is also at the heart of our approach.