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How did the US-China trade war create new export opportunities for “bystander” countries, and how did tariff elasticities and supply dynamics determine whether they benefited by acting as substitutes or complements to US and Chinese exports?

Image courtesy of interviewee. November 21, 2024

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This video discusses the impact of tariff increases initiated by the United States in 2018, marking a significant shift away from decades of trade liberalization. By the end of 2019, over 17,000 products were subject to tariffs, with average rates rising from approximately 4% to 26%. This video led to a trade war between the US and China, with an estimated $400 billion in trade affected, representing about 3.5% of US GDP; a larger impact compared to the historical Smoot-Hawley tariffs of 1930.

The analysis notes that the trade war didn't come as a complete surprise, given previous tensions with trade organizations and escalating public discourse around tariffs. Initially, there were expectations about how third countries would respond to the trade war.

A research paper mentioned explores the effects on third countries, finding that, on average, exporters from these nations increased their exports to the US, benefiting despite the context of a trade war. Notably, countries such as Vietnam and Mexico began to fill the gap left by China, and there was an unexpected growth in exports to other regions as well, countering the idea that trade wars reduce overall trade.

Findings highlighted include:
1. **Unexpected Benefit**: Many exporters from third countries benefited, exporting more in targeted product categories instead of less, showing a 6% higher growth in affected products compared to non-targeted ones.
2. **Heterogeneous Responses**: The effects of the trade war varied greatly between countries, influenced by country characteristics rather than just sectoral specializations.
3. **Country Characteristics**: A significant portion of the variation in responses was driven by pre-existing country-specific traits rather than their specialization in specific products.

This video concludes by emphasizing the complexity of the trade environment created by these tariffs and proposes further research to ascertain the long-term effects and persistency of these trends beyond 2019, especially considering changes introduced by the COVID-19 pandemic. The overarching lesson emphasizes the importance of integration into the global trading system to better position countries to benefit from such shifts.

Language:

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Here are five key points from the video:

1. **Transition from Trade Liberalization to Tariff Increases**: The video highlights a significant shift in U.S. trade policy starting in 2018, marked by the imposition of tariffs on a wide range of products, notably targeting China. By the end of 2019, over 17,000 products faced increased tariffs, with the average tariff rising from about 4% to 26%. This development represents a departure from previous decades of global trade liberalization.

2. **Comparison with Historical Tariffs**: The tariff war initiated by the U.S. is noted to have potentially more significant economic impacts than historical tariffs, such as the Smoot-Hawley tariffs of the 1930s, which affected about 1% of U.S. GDP. In contrast, the U.S.-China trade war impacted approximately 3.6% of U.S. GDP, indicating a major escalation in trade tensions.

3. **Effects on International Trade**: The analysis reveals that while U.S.-China trade declined significantly due to tariffs, some third countries experienced an increase in their exports to the U.S. This unexpected growth in exports, particularly from countries well integrated into the global trading system, indicates that not all countries were adversely affected by the trade war.

4. **Heterogeneous Responses Among Countries**: The video emphasizes the diverse reactions of countries to the trade war, noting that countries showed varied responses in terms of export growth. While some countries saw significant increases in exports, others experienced declines. The research found that this variability was primarily driven by country-specific characteristics rather than by sectoral specialization.

5. **Implications for Future Trade Research**: The findings highlight the need for further research into how global supply chains may have been reshaped by the trade war and the broader implications for trade liberalization. The video suggests exploring whether the observed patterns of export growth among various countries hold true in the convideo of developments after 2019, such as the COVID-19 pandemic and subsequent changes in global trade dynamics.

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Here are some key quotes and ideas distilled from the video:

1. **End of Trade Liberalization Era**: "2018 marks a clear end of this era in the sense that the United States imposes tariffs... So by the end of 2019, we have more than 17,000 products affected by tariffs."

2. **Significant Tariff Increases**: "The average tariff in the US rises from approximately 4% to approximately 26%. So it's a very large tariff increase."

3. **Comparison to Historical Tariffs**: "One could argue that this tariff war was more significant than the Smoot-Hawley tariffs of 1930."

4. **Global Economic Convideo**: "The global economy looks very different today compared to 1930."

5. **Impact of the Trade War**: "We find quite large effects on trade flows between the US and China... trade between the US and China did decline quite significantly."

6. **Impact on Third Countries**: "There was a pressing question among many countries, what does this imply for us?... There were other individuals who were more cautious and were worried about the effects that the increased uncertainty would have on the future of trade."

7. **Empirical Analysis**: "We are employing the standard empirical tools to see how exports of these countries were affected... the response across countries was heterogeneous."

8. **Surprising Export Growth**: "We find that the average exporter exports more in those products... the products that were targeted by tariffs experienced export growth on average."

9. **Non-Sectoral Factors in Export Growth**: "75% of the variation is driven by this country heterogeneity... the response with which countries respond is very strong and varies across countries."

10. **Benefits of Integration**: "Countries that experience the fastest export growth tend to be countries that are well integrated in the trading system as measured by the number of deep trade agreements they had signed."

11. **Future Research Directions**: "I think it would be premature to take... research question would be to try to extend these findings to more recent years."

These quotes encapsulate the main arguments and findings regarding the impact of the US-China trade war, the responses of third countries, the implications for trade policies, and the importance of integration in the global trading system.

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For many decades, the US

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and many other countries in,

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in the Western block pursued a policy

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of trade liberalization, open trade globalization.

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Uh, 2018 marks a clear end

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of this era in the sense

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that the United States imposes tariffs, first

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on a small set of products,

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coming from various countries,

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including countries in the European Union,

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later primarily on products coming from China, thousands

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of products coming from China.

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So by the end of 2019,

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we have more than seven thou 17,000

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products affected by tariffs.

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The average tariff in the US rises from approximately 4%

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to approximately 26%.

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So it's a very large, tariff increase China retaliates

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by taxing exports of the United States to China.

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So as a result, we have a full scale tariff war.

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Um, the total value of transactions affected

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by this trade war is of the order of $400 billion.

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So it's a very large figure.

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And to put that in perspective, this is approximately 3.5%,

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3.6% of US, GDP In 2017,

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the, the, previous,

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major, tariff increase,

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the Smoot-Hawley tariffs

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that have received a lot of attention.

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They affected approximately at that time in 1930,

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about 1% of U-S-G-D-P.

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So by, by this metric, one could argue that this tariff war

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was more significant than the Smoot-Hawley tariffs on 1930.

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Of course, the, the, the global economy looks very different

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today compared to 1930.

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I should also say that this tariff war,

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which represents the biggest departure

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from the liberalization agenda

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or previous decades, didn't come as a complete surprise.

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So for many years, we had a slow retreat

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from globalization.

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We had the Brexit vote in 2016.

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We had the, complaints

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that the US had about the World Trade Organization,

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the Apple body crisis in the WTO,

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the withdrawal of the US from TPP.

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So there were mounting frustrations

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with a global trading system.

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There were many promises made

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during the presidential campaign in the US to raise tariffs.

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So the tariffs didn't come as a complete surprise.

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Nevertheless, in terms of concrete policy action,

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it's the first concrete policy action the US took.

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Um, and they remain in place.

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So I, the Biden administration did not reverse the tariffs.

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They remained in place.

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In fact, in some cases, they promised,

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even higher tariff, increases.

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And as we probably all know, the, the newly elected,

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the president elect

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of the United States has also promised very steep tariff

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increases vis-a-vis China of the order of 60%,

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the US China trade war.

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It was a very significant policy development.

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So not surprisingly, there were a number of, papers,

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including one that I wrote with the same co-authors

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on the effect of the US China trade war on the US and China.

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So these are the two main,

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participants in this trade war.

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And,

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we all found quite large effects on trade flows

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between the US and China.

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The welfare effects were relatively small,

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but trade between the US

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and China did decline quite significantly.

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However, no one quite knew how other countries,

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what we call third countries

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or bystander countries were affected.

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And, at that time, so around 2019,

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I was actually at the World Bank,

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and it was a pressing question among many countries,

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what does this imply for us?

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Um, so there were some countries,

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or some individuals I should say, who were truly euphoric.

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They thought this trade war is going

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to present new opportunities for us

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to take the place of China.

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So perhaps Vietnam or Mexico can become the new China

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and export massively to the United States.

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And there were other, individuals who were more cautious

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and were worried about the effects

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that the increased uncertainty would have,

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on the future of trade.

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And, and so I thought it was a really interesting question,

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an open question of

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how these third countries would be affected,

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by the trade war.

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So this is the question that our paper tried

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to address from a methodological point of view.

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We are employing.

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So we are employing the empirical standard empirical tools

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to see how, exports were

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of these countries were affected in combination

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with also a standard trade model that we slightly modify

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to account for heterogeneity of country responses

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to these tariffs.

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And this differentiates it from the previous literature.

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So one of our main findings is actually that the response

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very substantially across countries.

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And by that I don't mean simply the outcome, the results,

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but I also mean the elasticity of the response.

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This was, very different across countries.

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And, this is also from a methodological point of view.

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As, as a, as a purely intellectual question,

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you have three main findings,

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and I would say two of them are surprising.

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Um, one of them not.

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Uh, the first finding that's quite surprising is

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that we find on average, countries exporters

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benefited from this trade war.

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This is surprising because we don't

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Think that a war creates trade,

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but this is what seems to be happening in this case,

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an important caveat.

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We are looking only at exports,

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not at welfare, not at other metrics.

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And our analysis stops in 2019.

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And this is because afterwards we have the covid pandemic.

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So this confuses the picture.

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But as of the end of 2019,

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what happens is the average exporter,

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exports more in those products

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that were targeted by the tariffs.

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So in other words, we compare the export growth

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in the products that were not targeted by tariffs

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to the export growth in products targeted by the tariffs.

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And we find that the products that were targeted

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by tariffs experienced, export growth on average,

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they grew,

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6% more than the products not targeted by tars.

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Why is this happening? It's happening

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because most countries, not all of them,

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but most countries start exporting more to the us.

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Um, so they take the place of China as some anticipated,

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but surprisingly, they also export

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more to the rest of the world.

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And that's the surprising finding.

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So they don't scale back their exports to Europe

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or to other destinations

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or to the rest of the world, they export more.

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So this is the first finding, and it's quite surprising.

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The second finding that is not surprising, as I,

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as I was stated, is that the,

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the response across countries was heterogeneous.

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There is enormous heterogeneity.

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So, some countries,

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gained by 20%.

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Some, there are also individual countries whose export

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growth went down by 20%.

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Uh, that by itself is not surprising.

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But what is surprising is finding number three, which tries

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to look at the sources of this heterogeneity.

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And most people would have thought that the source

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of this heterogeneity is preexisting

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specialization patterns.

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So for example, the United States

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raised tariffs on machinery.

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So someone might have thought if Vietnam

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or Mexico specialize in machinery, they're going

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to benefit from this, and this is true.

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So we do find this,

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but in addition to product specialization, we find

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that the response, the elasticity

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with which countries respond is very strong

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and varies across countries.

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And that is not driven by sectoral specialization,

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it's driven by country characteristics.

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And in fact, we find that 75% of the variation is driven

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by this country heterogeneity

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that is quite interesting and unexpected.

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Um, so if I take together findings one

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and findings three, what essentially they suggest to speak,

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you know, the language of economics is that

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for many countries we have done what sloping supply curves.

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Usually we think the supply curve is upward sloping.

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Here what we show is we have a downward sloping supply

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curve for many countries.

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And what really drives this, negative slope

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is not sectoral specialization.

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You might think these are economies of scale, economies

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of scale in most people's mind are sector specific.

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Instead, you can think of this economies of scale

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as being country specific.

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I think it raises some questions at a very relevant policy.

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So the first one is, despite

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what was said actually in the short run,

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and when it comes to exports, many countries seem to benefit

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from this trade war.

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It was not the end of the war.

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The obvious question is which countries benefited

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and what would it take for countries, to actually

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with the benefits of this situation

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that we usually we won't think is advantageous

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to trade and exports?

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And there the, the answer is quite interesting.

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That speaks to, to the issue of country heterogeneity,

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what drives this country heterogeneity.

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And in some preliminary results, we show that the countries

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that experience the fastest export growth tend

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to be countries that are well integrated in the trading

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system as measured by the number

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of deep trade agreements they had signed the stock

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of foreign direct investments.

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So in other words, we cannot really tell what drives this,

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country heterogeneity.

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And that's, that's why I said this is a ques a question for,

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for, future research.

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But one hypothesis is that during that time,

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global supply chains we allocate in very complex ways.

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So they move from China to Vietnam or Malaysia or Mexico,

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and which are the countries that benefit from that?

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They're the countries that are well positioned

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to increase their exports.

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So these are countries that are already well integrated

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in the world trading system.

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So on one hand there is this negative message if you want,

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for, trade liberalization.

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Tariffs are actually a very significant tariff increase,

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was not the end of the world in some countries

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ended up benefiting.

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But on the other world, on the other side, the countries

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that benefit other countries

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that had already integrated the world trading system.

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So that speaks to the benefits of integration.

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So I think it would be premature to take to, to, to,

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extract the message that the trade war is something

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that's actually good for trade.

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Number one research question, would be to try

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to extend these findings to this, approach

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to more recent years because our analysis tops in 2019.

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Um, it's a very interesting question.

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Do this fund, do these results hold if we extend the sample

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to 2024?

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Um, so I think this is something that is very easy to do

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and I would encourage people to actually do it if

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the results survive.

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If we, if we still find that countries on average benefited,

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from this trade war

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and that there is heterogeneity,

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then it would be a major research project to actually try

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to unpack the sources of this heterogeneity.

End of Trade Liberalization: The Rise of Tariffs in the US

00:00:00 - For many decades, the US and many other countries in, in the Western block pursued a policy of trade liberalization, open trade globalization. 2018 marks a clear end of this era in the sense that the United States imposes tariffs, first on a small set of products, coming from various countries, including countries in the European Union, later primarily on products coming from China, thousands

00:00:35 - So by the end of 2019, we have more than seven thou 17,000 products affected by tariffs. The average tariff in the US rises from approximately 4% to approximately 26%. So it's a very large, tariff increase China retaliates by taxing exports of the United States to China. So as a result, we have a full scale tariff war. the total value of transactions affected

00:01:11 - So it's a very large figure. And to put that in perspective, this is approximately 3.5%, 3.6% of US, GDP In 2017, the, the, previous, major, tariff increase, the Smoot-Hawley tariffs that have received a lot of attention.

Tariff Wars: A Shift from Liberalization and Globalization

00:01:43 - about 1% of U-S-G-D-P. So by, by this metric, one could argue that this tariff war was more significant than the Smoot-Hawley tariffs on 1930. Of course, the, the, the global economy looks very different today compared to 1930. I should also say that this tariff war, which represents the biggest departure from the liberalization agenda or previous decades, didn't come as a complete surprise.

00:02:15 - from globalization. We had the Brexit vote in 2016. We had the, complaints that the US had about the World Trade Organization, the Apple body crisis in the WTO, the withdrawal of the US from TPP. So there were mounting frustrations with a global trading system. There were many promises made during the presidential campaign in the US to raise tariffs.

00:02:44 - Nevertheless, in terms of concrete policy action, it's the first concrete policy action the US took. and they remain in place. So I, the Biden administration did not reverse the tariffs. They remained in place. In fact, in some cases, they promised, even higher tariff, increases. And as we probably all know, the, the newly elected, the president elect of the United States has also promised very steep tariff

Impact of the US-China Trade War on Global Trade Dynamics

00:03:17 - the US China trade war. It was a very significant policy development. So not surprisingly, there were a number of, papers, including one that I wrote with the same co-authors on the effect of the US China trade war on the US and China. So these are the two main, participants in this trade war. And, we all found quite large effects on trade flows between the US and China.

00:03:48 - but trade between the US and China did decline quite significantly. However, no one quite knew how other countries, what we call third countries or bystander countries were affected. And, at that time, so around 2019, I was actually at the World Bank, and it was a pressing question among many countries, what does this imply for us? so there were some countries, or some individuals I should say, who were truly euphoric. They thought this trade war is going

00:04:19 - to take the place of China. So perhaps Vietnam or Mexico can become the new China and export massively to the United States. And there were other, individuals who were more cautious and were worried about the effects that the increased uncertainty would have, on the future of trade. And, and so I thought it was a really interesting question, an open question of how these third countries would be affected, by the trade war. So this is the question that our paper tried

Analyzing Export Responses to Tariffs and Country Heterogeneity

00:04:52 - We are employing. So we are employing the empirical standard empirical tools to see how, exports were of these countries were affected in combination with also a standard trade model that we slightly modify to account for heterogeneity of country responses to these tariffs. And this differentiates it from the previous literature. So one of our main findings is actually that the response

00:05:23 - And by that I don't mean simply the outcome, the results, but I also mean the elasticity of the response. This was, very different across countries. And, this is also from a methodological point of view. As, as a, as a purely intellectual question, you have three main findings, and I would say two of them are surprising. one of them not. the first finding that's quite surprising is that we find on average, countries exporters

00:05:54 - This is surprising because we don't Think that a war creates trade, but this is what seems to be happening in this case, an important caveat. We are looking only at exports, not at welfare, not at other metrics. And our analysis stops in 2019. And this is because afterwards we have the covid pandemic. So this confuses the picture. But as of the end of 2019, what happens is the average exporter, exports more in those products

Unexpected Export Growth Amid Tariff Impacts

00:06:27 - So in other words, we compare the export growth in the products that were not targeted by tariffs to the export growth in products targeted by the tariffs. And we find that the products that were targeted by tariffs experienced, export growth on average, they grew, 6% more than the products not targeted by tars. Why is this happening? It's happening because most countries, not all of them, but most countries start exporting more to the us.

00:07:01 - but surprisingly, they also export more to the rest of the world. And that's the surprising finding. So they don't scale back their exports to Europe or to other destinations or to the rest of the world, they export more. So this is the first finding, and it's quite surprising. The second finding that is not surprising, as I, as I was stated, is that the, the response across countries was heterogeneous. There is enormous heterogeneity. So, some countries,

00:07:32 - Some, there are also individual countries whose export growth went down by 20%. that by itself is not surprising. But what is surprising is finding number three, which tries to look at the sources of this heterogeneity. And most people would have thought that the source of this heterogeneity is preexisting specialization patterns. So for example, the United States raised tariffs on machinery. So someone might have thought if Vietnam or Mexico specialize in machinery, they're going

Country Characteristics and Trade Response Elasticity

00:08:05 - So we do find this, but in addition to product specialization, we find that the response, the elasticity with which countries respond is very strong and varies across countries. And that is not driven by sectoral specialization, it's driven by country characteristics. And in fact, we find that 75% of the variation is driven by this country heterogeneity that is quite interesting and unexpected. so if I take together findings one

00:08:38 - you know, the language of economics is that for many countries we have done what sloping supply curves. Usually we think the supply curve is upward sloping. Here what we show is we have a downward sloping supply curve for many countries. And what really drives this, negative slope is not sectoral specialization. You might think these are economies of scale, economies of scale in most people's mind are sector specific.

00:09:08 - as being country specific. I think it raises some questions at a very relevant policy. So the first one is, despite what was said actually in the short run, and when it comes to exports, many countries seem to benefit from this trade war. It was not the end of the war. The obvious question is which countries benefited and what would it take for countries, to actually with the benefits of this situation

Country Heterogeneity in Export Growth Post-Tariff War

00:09:41 - to trade and exports? And there the, the answer is quite interesting. That speaks to, to the issue of country heterogeneity, what drives this country heterogeneity. And in some preliminary results, we show that the countries that experience the fastest export growth tend to be countries that are well integrated in the trading system as measured by the number of deep trade agreements they had signed the stock

00:10:09 - So in other words, we cannot really tell what drives this, country heterogeneity. And that's, that's why I said this is a ques a question for, for, future research. But one hypothesis is that during that time, global supply chains we allocate in very complex ways. So they move from China to Vietnam or Malaysia or Mexico, and which are the countries that benefit from that? They're the countries that are well positioned to increase their exports.

00:10:41 - in the world trading system. So on one hand there is this negative message if you want, for, trade liberalization. Tariffs are actually a very significant tariff increase, was not the end of the world in some countries ended up benefiting. But on the other world, on the other side, the countries that benefit other countries that had already integrated the world trading system. So that speaks to the benefits of integration. So I think it would be premature to take to, to, to,

Exploring Trade Dynamics Post-2019: A Call for Further Research

00:11:13 - that's actually good for trade. Number one research question, would be to try to extend these findings to this, approach to more recent years because our analysis tops in 2019. it's a very interesting question. Do this fund, do these results hold if we extend the sample to 2024? so I think this is something that is very easy to do and I would encourage people to actually do it if

00:11:56 - If we, if we still find that countries on average benefited, from this trade war and that there is heterogeneity, then it would be a major research project to actually try to unpack the sources of this heterogeneity.

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