ECO412 Presentation

THE IMPACT OF U.S. CHINA TRADE WAR – A GRAVITY APPROACH

Authors: Charandabi, Sina E., Ghashami, Farnaz, and Kamyar

November 8, 2024

ECO412 Presentation November 8, 2024 1 / 45

The U.S.-China Trade War: An Economic Conflict Reshaping Global Trade

A Long-standing Rivalry: Over the past few decades, China’s rapid

industrialization has challenged the U.S.’s position as a dominant economic power.
Concerns over intellectual property, trade imbalances, and state-supported Chinese
industries fueled mounting tensions.
The Trade War Begins: In 2018, the U.S. imposed tariffs on Chinese goods to
address what it saw as unfair trade practices and to curb the trade deficit. China
retaliated, leading to an escalating cycle of tariffs on products ranging from
electronics to agricultural goods, worth hundreds of billions of dollars.
Global Economic Disruptions: The ripple effects of this trade war extended well
beyond the U.S. and China. Countries like Vietnam, Mexico, and India began to
experience shifts in trade patterns as companies and supply chains adapted to avoid
tariffs. Global trade flows became more complex, redirecting goods through
third-party countries.

ECO412 Presentation November 8, 2024 2 / 45

Problem Statement: Addressing Trade Disruptions from the U.S.-China
Tariff War

Limitations of Traditional Models: Standard gravity models in trade analysis

struggle to account for the complexities of tariffs and non-tariff barriers (NTBs),
particularly under a trade war scenario. They fall short in capturing trade diversions,
welfare impacts, and shifts in global supply chains.
Research Gap: There is a need for a more robust model that can incorporate these
complex variables to accurately predict trade flows and economic impacts under
tariff scenarios. This research aims to bridge that gap.
Objective of the Analysis: Using a structural gravity model, this study will assess
how tariffs and NTBs between the U.S. and China influence bilateral trade, divert
trade to other nations, and impact GDP and welfare in multiple economies. The
analysis will provide a more comprehensive view of the trade war’s ripple effects on
the global economy.

ECO412 Presentation November 8, 2024 3 / 45

Why Gravity Model ?

Capturing Trade Flow Patterns: The gravity model is a well-established tool in

international trade analysis. It effectively captures trade flow patterns by linking
bilateral trade volumes to economic size and distance, making it ideal for
understanding the foundational dynamics between two large economies like the U.S.
and China.
Incorporating Economic Variables: The model allows for the inclusion of key
economic variables such as GDP, distance, tariffs, and non-tariff barriers (NTBs),
providing a comprehensive view of the factors influencing trade. This flexibility is
critical in evaluating the complex interactions of tariffs in a trade war.
Adapting to Policy Changes: The structural gravity model extends the traditional
model by incorporating multilateral trade resistance terms, trade diversion effects,
and tariff scenarios, allowing for an adaptable framework that can simulate different
policy impacts under various trade war conditions.
Predictive Power with Counterfactual Scenarios: The model supports
counterfactual analysis, enabling predictions of trade flows under hypothetical
scenarios (e.g., one-way vs. two-way tariffs). This capability is invaluable in
assessing the potential outcomes of policy decisions made during the U.S.-China
trade war.

ECO412 Presentation November 8, 2024 4 / 45

Evolution of Gravity Model

McCallum’s Border Puzzle (1995): McCallum examined trade between Canadian

provinces and U.S. states and found that Canadian provinces traded significantly
more with each other than with U.S. states, even after accounting for distance and
economic size. This phenomenon became known as the “Border Puzzle.”
Equation Used: McCallum used a simple gravity model to analyze trade flows:

GDPi · GDPj
Xij = α
Dij
where:
Xij : Trade flow from region i to region j
GDPi , GDPj : Gross Domestic Products of regions i and j
Dij : Distance between i and j
α: A constant
Insight: This model showed that internal trade (within Canada) was 22 times
higher than cross-border trade with the U.S., highlighting the limitations of
traditional gravity models in accounting for border-related trade barriers.

ECO412 Presentation November 8, 2024 5 / 45

Evolution of Gravity Model

Anderson and van Wincoop’s Structural Gravity Model (2003): Anderson and
van Wincoop addressed McCallum’s Border Puzzle by introducing multilateral
resistance terms, which account for both bilateral trade costs and the overall trade
resistance each country faces globally.
Equation: The structural gravity model they proposed is:
 1−σ
Yi Yj tij
Xij =
YW Pi Pj
where:
Xij : Trade flow from country i to country j
Yi , Yj : Economic sizes (GDPs) of countries i and j
YW : World GDP
tij : Trade cost between i and j
Pi , Pj : Multilateral resistance terms for i and j
σ: Elasticity of substitution
Significance: By incorporating multilateral resistance, this model more accurately
reflects trade flows, resolving some of the limitations highlighted by McCallum’s
findings.

ECO412 Presentation November 8, 2024 6 / 45

Evolution of Gravity Model

Baldwin and Taglioni’s Methodological Improvements (2006): Baldwin and

Taglioni identified common estimation errors in gravity models, particularly the
omission of multilateral resistance terms and improper handling of time-invariant
variables.
Improved Equation: They proposed including time-varying country fixed effects to
control for multilateral resistance terms more effectively:

Xijt = exp(δit + δjt + βZijt ) + ϵijt

where:
Xijt : Trade flow from country i to country j at time t
δit , δjt : Time-varying fixed effects for countries i and j
Zijt : Vector of explanatory variables (e.g., distance, tariffs)
ϵijt : Error term
Impact: These methodological improvements reduce bias and enhance the accuracy
of gravity model estimations, making them more reliable for complex trade analyses.

ECO412 Presentation November 8, 2024 7 / 45

Literature Review

Foundational Studies on the Gravity Model: Anderson and van Wincoop (2003)
and Baldwin (2007) laid the groundwork for understanding how trade
resistance—including tariffs and non-tariff barriers (NTBs)—affects international
trade flows. Their work emphasized the importance of accounting for multilateral
trade resistance, making the gravity model a reliable tool for analyzing bilateral
trade patterns.
Focus on Trade Wars and Tariff Impacts: Recent studies have increasingly
applied the gravity model to analyze trade conflicts, such as the U.S.-China tariff
war. These studies underscore the importance of incorporating tariff changes and
NTBs to capture the trade diversion effects seen when trade shifts to third-party
countries like Vietnam and Mexico due to increased U.S.-China tariffs.
Advanced Econometric Techniques: Techniques like Poisson Pseudo Maximum
Likelihood (PPML) have become crucial for estimating trade flows, especially under
conditions with zero-trade observations and heteroscedasticity. PPML is particularly
useful for addressing the complex, asymmetrical patterns that arise in trade wars.
Contribution of This Study: To address the gaps in traditional models, this
research employs a structural gravity model enhanced with Non-Tariff Measure
(NTM) indices—Prevalence Score. This approach allows a comprehensive
assessment of how the U.S.-China trade war has reshaped global trade flows and
affected welfare in various economies.
ECO412 Presentation November 8, 2024 8 / 45
Data Collection and Sources

Data Coverage:
Time Frame: 2017 to 2021
Countries Analyzed:
United States, China, Canada, Mexico, Germany, Japan, South Korea, India and Vietnam.
Sectors (HS Codes):
HS 0-24 (Agriculture): Live animals; animal products; vegetable products; animal or
vegetable fats and oils; prepared foodstuffs; beverages, spirits, and vinegar; tobacco and
manufactured tobacco substitutes.
HS 72-76 (Metals): Iron and steel; articles of iron or steel; copper and articles thereof;
nickel and articles thereof; aluminum and articles thereof.
HS 85 (Technology): Electrical machinery and equipment; sound recorders and reproducers;
television image and sound recorders and reproducers; parts and accessories thereof.
HS 87 (Automobiles): Vehicles other than railway or tramway rolling stock, and parts and
accessories thereof.
Primary Data Sources:
United Nations Comtrade Database: Comprehensive international trade statistics.
World Bank: GDP and economic indicators.
CEPII’s GeoDist Database: Geographical distances between countries.
World Integrated Trade Solution (WITS): Tariff and non-tariff measures data.

ECO412 Presentation November 8, 2024 9 / 45

Dataset Preview

ECO412 Presentation November 8, 2024 10 / 45

Variable Descriptions

Variable Name Description

Imp. Value (1000$) Import value in thousands of U.S. dollars
Importer Country importing the product
Exporter Country exporting the product
HS Harmonized System (HS) code for product classification
Product Name Name or type of the product being traded
Year Year of the trade data record
GDP (Imp) (mn $) Gross Domestic Product of the importer in million U.S. dollars
GDP (Exp) (mn $) Gross Domestic Product of the exporter in million U.S. dollars
Distance Geographical distance between importer and exporter
Duty Type Type of duty or tariff applied to the product
Avg. Tariff Average tariff rate applied on the traded product
NTB (Imp) Non-tariff barriers in the importing country
NTB (Exp) Non-tariff barriers in the exporting country
COB Dummy variable indicating if countries share a common border
TC Trade costs associated with the transaction
TD1 Trade diversion dummy variable 1
TD2 Trade diversion dummy variable 2
IMP x Importer-specific dummy variables
EXP x Exporter-specific dummy variables
USMCA Indicator variable for the United States-Mexico-Canada Agreement membership
RCEP Indicator variable for Regional Comprehensive Economic Partnership membership
ASEAN+ Indicator variable for ASEAN Plus agreement membership
PPI Producer Price Index, indicating the average change over time in the selling prices received by
domestic producers

ECO412 Presentation November 8, 2024 11 / 45

Model Specification
The functional form of our model, where the dependent variable is represented as a func-
tion of independent variables, is given by:


Xij = F dij , Yi , Yj , NTBi , NTBj , IMP1 . . . IMP9 , EXP1 . . . EXP9 , TD1 , TD2 , COBij , 1 + ∆tij

where,
Xij : Import value in Country i from Country j (in thousands of USD)
Yi : GDP of the importing country i (in million USD)
Yj : GDP of the exporting country j (in million USD)
dij : Bilateral distance between countries i and j
NTBi : Non-Tariff Barrier in the importing country i (Prevalence Score)
NTBj : Non-Tariff Barrier in the exporting country j
IMPk : Importer dummy variables (for each of the 9 importing countries)
EXPk : Exporter dummy variables (for each of the 9 exporting countries)
TC : Trade creation dummy variable
TD1 : Trade diversion dummy variable 1
TD2 : Trade diversion dummy variable 2
COBij : Dummy variable indicating if countries i and j share a common border
1 + ∆tij : Change in tariffs between countries i and j
ECO412 Presentation November 8, 2024 12 / 45
Baseline Estimation

The model is estimated using two approaches: Two-Way Fixed Effects (TWFE) and
Poisson Pseudo Maximum Likelihood (PPML).
Two-Way Fixed Effects (TWFE):
log(Imp. Valueij ) = α + β1 log(GDP (Exp)j ) + β2 log(GDP (Imp)i ) + β3 log(Distanceij ) + β4 log(ATE)

9
X 9
X
+β5 log(NTB (Exp)j ) + β6 log(NTB (Imp)i ) + γk IMPk + δk EXPk + θ1 TD1 + θ2 TD2 + ρCOBij + σTC + ϵij
k=1 k=1

Poisson Pseudo Maximum Likelihood (PPML):

Imp. Valueij = exp(α + β1 GDP (Exp)j + β2 GDP (Imp)i + β3 Distanceij + β4 ATE + β5 NTB (Exp)j + β6 NTB (Imp)i

9
X 9
X
+ γk IMPk + δk EXPk + θ1 TD1 + θ2 TD2 + ρCOBij + σTC) + ϵij
k=1 k=1

ECO412 Presentation November 8, 2024 13 / 45

Baseline Estimation Codes

This code snippet shows the implementation of the Two-Way Fixed Effects (TWFE)
methodology for estimating the impact of various factors on trade flows between coun-
tries.

This code snippet shows the implementation of the Poisson Pseudo Maximum Likelihood
(PPML) methodology, which handles zero trade flows and addresses heteroscedasticity
issues in trade data.
ECO412 Presentation November 8, 2024 14 / 45
Two-Way Fixed Effects (TWFE) - Results

The table presents the OLS regression results for the TWFE model, showing coefficients,
standard errors, t-values, and significance levels.
ECO412 Presentation November 8, 2024 15 / 45
Interpretation of Key TWFE Results
Key Findings and Economic Implications:
log GDP Exporter (0.497) and log GDP Importer (0.971): Both positive
coefficients indicate that as the economic size of either trading partner increases,
trade volume also increases. This supports the gravity model, suggesting that larger
economies tend to engage in more trade.
log Distance (-0.977): The negative coefficient shows that distance acts as a trade
deterrent. For every 1% increase in distance, trade decreases by 0.977%, aligning
with theory that geographic raises transportation costs & reduces trade.
log ATE (-0.4423): The negative coefficient on average tariffs indicates that higher
tariffs are associated with reduced trade flows, as tariffs increase import costs and
reduce the competitiveness of foreign goods.
log NTB Exporter (-0.1257) and log NTB Importer (-0.5767): The negative
coefficients for non-tariff barriers confirm their role as obstacles to trade, with the
NTB impact being stronger on the importer side. Non-tariff barriers add compliance
costs, making trade less attractive.
Trade Diversion Dummies (TD1: 0.8507, TD2: 0.1408): The positive
coefficients for TD1 and TD2 suggest that trade may be diverted to alternative
markets, supporting the concept of trade redirection due to high tariffs.
Conclusion: The TWFE results support classical trade theories and the gravity model,
showing that larger economies trade more, and trade barriers (distance, tariffs, and NTBs)
reduce trade flows.
ECO412 Presentation November 8, 2024 16 / 45
Poisson Pseudo Maximum Likelihood (PPML) - Results

The table presents the GLM regression results using the PPML method, including coeffi-
cients, standard errors, z-values, and significance levels.
ECO412 Presentation November 8, 2024 17 / 45
Interpretation of Key PPML Results
Key Findings and Economic Implications:
GDP Exp (0.1181) and GDP Imp (0.7861): Positive coefficients reinforce the
gravity model, suggesting that countries with larger GDPs trade more. A 1-unit
increase in the exporter’s GDP is associated with an 11.81% increase in trade, while
the importer’s GDP has an even more substantial impact at 78.61
Distance (-0.5732): The negative coefficient indicates that geographical distance
significantly reduces trade, with every 1-unit increase in distance leading to a
57.32% decrease in trade flow, consistent with the idea that longer distances raise
transportation costs.
ATE (-0.5345): This negative coefficient on tariffs suggests a 53.45% reduction in
trade flow for every 1-unit increase in the average tariff rate, highlighting tariffs’
strong deterrent effect on trade volumes.
NTB Exp (-0.3002) and NTB Imp (-0.0346): Both coefficients for non-tariff
barriers are negative, with the exporter’s NTB having a more substantial impact on
trade reduction. This aligns with the notion that non-tariff barriers limit market
access and increase trade compliance costs.
Conclusion: The PPML results provide further evidence in support of trade theory, high-
lighting the importance of GDP, distance, and tariffs. The negative impact of non-tariff
barriers variables underscores the complexity of trade barriers, with both tariffs and non-
tariff measures acting as significant trade deterrents.
ECO412 Presentation November 8, 2024 18 / 45
GE-PPML Estimation

General Equilibrium Poisson Pseudo Maximum Likelihood (GE-PPML):

GE-PPML is a robust estimator widely used in international trade for general
equilibrium analysis.
The method allows for zero trade values by using a Poisson model, making it
suitable for trade data with sparsity or heteroscedasticity issues.
It includes fixed effects to control for unobserved characteristics between pairs of
trading partners (Exporter and Importer fixed effects).
In a GE framework, GE-PPML enables the evaluation of general equilibrium effects,
such as changes in welfare, GDP, and trade impacts due to policy changes.
The model is effective in measuring the effects of trade agreements, tariffs, and
non-tariff barriers, linking to economic theory by accounting for comparative
advantage and trade costs.

ECO412 Presentation November 8, 2024 19 / 45

Importer and Exporter Fixed Effects

Overview:
Fixed effects capture unobserved, country-specific characteristics that influence
trade independently of observable variables like GDP or distance.
In trade theory, these fixed effects help identify inherent advantages or barriers in
certain countries, reflecting factors like infrastructure, regulatory environment, and
cultural factors.
High positive fixed effects suggest countries with favorable conditions for trade,
while negative fixed effects indicate potential trade barriers or limitations.

ECO412 Presentation November 8, 2024 20 / 45

Importer and Exporter Fixed Effects

Fixed Effects for Exporters and

Importers
Country Exp. F.E Imp. F.E
United States 0.245 -0.004
China 0.132 -0.099
Vietnam 0.086 0.134
Canada 0.070 0.002
India 0.051 -0.146
Germany 0.046 -0.115
Mexico 0.045 0.022
Korea, Rep. -0.020 0.055
Japan -0.055 -0.040

ECO412 Presentation November 8, 2024 21 / 45

Interpretation of Importer and Exporter Fixed Effects
Detailed Interpretation of Key Results:
Exporter Fixed Effects: Vietnam’s positive exporter effect (0.086) suggests it has
benefited as an alternative manufacturing hub, with some trade diverted from China
due to the tariffs.
Importer Fixed Effects: Vietnam’s high positive importer effect (0.134) indicates
that it has become a key destination for imports, possibly due to shifts in supply
chains away from China as companies look to avoid tariffs. This shift benefits
Vietnam’s domestic industries, which now import more raw materials and
components. Korea (0.055) and Mexico (0.022) also show positive importer effects,
likely reflecting similar supply chain adjustments where these countries have
absorbed trade flows redirected from China.
Conclusion: These fixed effects provide empirical insights into each country’s trade dy-
namics:
High positive exporter fixed effects align with comparative advantage and
competitive export sectors.
Positive importer fixed effects indicate openness to imports, while negative effects
suggest protectionist policies or trade barriers.
The findings highlight the diversity in trade policies and economic structures across
countries, supporting theories of comparative advantage, protectionism, and
intra-industry trade.
ECO412 Presentation November 8, 2024 22 / 45
GDP Change

Overview:
GDP changes reflect the economic health of a country, influenced by factors like
trade flows, investment, and production.
In the context of the U.S.-China tariff war, GDP growth patterns can indicate
economic resilience or vulnerability due to shifts in trade policies and supply chain
adjustments.
Countries closely tied to the U.S. or China may experience economic impacts, either
positive or negative, depending on their role in redirected trade flows and supply
chain restructuring.

ECO412 Presentation November 8, 2024 23 / 45

GDP Change

ECO412 Presentation November 8, 2024 24 / 45

GDP Change

Interpretation of the Graph:

In 2020, most countries saw a decline in GDP growth, likely due to combined effects
of the tariff war and global economic challenges, such as the COVID-19 pandemic.
By 2021, countries like Canada and India exhibited significant GDP growth (over
20%), likely benefiting from trade redirection away from China.
China and the United States showed moderate growth recovery in 2021, reflecting
their ability to adapt, though impacted by ongoing tariffs.
Conclusion:
The U.S.-China tariff war led to shifts in global trade flows, with some countries
benefiting from redirected trade, as reflected in positive GDP growth changes.
Emerging economies like Vietnam experienced substantial GDP growth as they
absorbed supply chain shifts, while countries heavily reliant on the U.S. or China
faced mixed impacts.
The GDP fluctuations provide insights into the broader economic adjustments
caused by the tariff war, highlighting the resilience and adaptability of certain
economies in the face of trade policy shifts.

ECO412 Presentation November 8, 2024 25 / 45

FGP Change

Overview:
The Foreign Goods Price (FGP) measures the relative price changes of imported
goods, reflecting the effects of tariffs, trade policies, and global supply chain
adjustments.
In the context of the U.S.-China tariff war, FGP changes can indicate shifts in
import costs due to tariffs imposed on goods, leading countries to seek alternative
suppliers or adjust to higher prices on imports.
Countries that act as alternative suppliers or are affected by redirected demand may
experience distinct FGP trends.

ECO412 Presentation November 8, 2024 26 / 45

FGP Change

ECO412 Presentation November 8, 2024 27 / 45

FGP Change
Interpretation of the Graph:
From 2018 to 2021, FGP trends reveal a mixed impact across countries. Notably,
the United States and India show a consistent increase in FGP, indicating higher
import prices, possibly due to redirected trade flows and increased reliance on
non-Chinese suppliers.
China shows a stable FGP until 2021, reflecting controlled import price growth
despite the tariffs, potentially due to maintaining domestic production capabilities.
Emerging economies like Vietnam and Korea, Rep. show more gradual FGP
increases, suggesting they absorbed some redirected trade flows and supply chain
adjustments with moderate pricing impacts.
Japan and Germany exhibit stable or declining FGP changes over time, potentially
indicating diversified supply chains or less dependency on affected goods.
Conclusion:
The U.S.-China tariff war led to shifts in import costs for many countries, with
alternative suppliers experiencing moderate FGP increases as they absorbed
redirected demand.
Countries with higher FGP growth likely faced higher import prices as they shifted
away from Chinese goods due to tariffs, while countries with stable FGP trends
maintained diversified supply chains to mitigate price volatility.
These changes illustrate how trade policies impact foreign goods prices, shaping
economic resilience and adaptability in international markets.
ECO412 Presentation November 8, 2024 28 / 45
World and Country-Level Welfare Impact

Overview:
Welfare changes reflect economic well-being, often impacted by trade policies, shifts
in global demand, and cost of goods.
The U.S.-China tariff war has influenced welfare by disrupting trade flows, altering
import and export costs, and prompting countries to re-evaluate trade partners.
Examining welfare on a world and country level allows us to assess the relative
economic gains or losses from these shifts.

ECO412 Presentation November 8, 2024 29 / 45

World and Country-Level Welfare Impact

ECO412 Presentation November 8, 2024 30 / 45

World and Country-Level Welfare Impact

ECO412 Presentation November 8, 2024 31 / 45

World and Country-Level Welfare Impact
Interpretation of Graphs:
World Welfare Change (Graph 1): - In 2018 and 2019, world welfare saw negative
growth, likely due to early trade tensions and increased import costs from tariffs. -
A slight recovery is visible in 2020, perhaps reflecting temporary trade adjustments
or relaxed tariffs, but 2021 shows a further decline as trade impacts persisted due to
Covid-19.
Country-Level Welfare Change (Graph 2): - Countries like Vietnam (2018) and
Canada (2020, 2021) experienced higher welfare changes, potentially benefiting
from redirected trade as the tariff war encouraged diversifying supply sources. -
China and the United States experienced fluctuating welfare changes mostly
negative imapct, reflecting the direct economic impacts of tariffs and shifting trade
dynamics. - Germany and Japan showed relatively stable welfare changes, possibly
due to diversified trade networks that mitigated the impact of the tariff war.
Conclusion:
The U.S.-China tariff war had a mixed impact on welfare, with countries like Mexico
and Vietnam benefitting from increased demand as alternative suppliers.
World welfare fluctuated, reflecting global economic uncertainty and adjustments in
trade policies.
Overall, welfare changes illustrate the resilience of economies able to adjust to new
trade dynamics and the challenges faced by countries more directly impacted by
tariffs.
ECO412 Presentation November 8, 2024 32 / 45
Net Export Change

Overview:
Net export change captures fluctuations in a country’s exports, which can be
influenced by external trade policies, economic demand, and competitive market
adjustments.
The U.S.-China tariff war disrupted traditional trade routes, forcing countries to
seek alternative markets or suppliers, affecting export values.
Analyzing the net export change offers insights into how countries adjusted their
export strategies and trade partnerships during the trade conflict.

ECO412 Presentation November 8, 2024 33 / 45

Net Export Change

ECO412 Presentation November 8, 2024 34 / 45

Net Export Change

Interpretation of the Graph:

Vietnam shows a substantial spike in 2019, reflecting an increase in exports
potentially due to diverted trade demand as companies shifted away from China.
China and the United States experienced relatively stable export changes,
indicating adjustments in their export volumes despite the tariff war.
Countries like India and Germany maintained a steady export trend, potentially
benefiting from demand as alternative suppliers without major surges or declines.
The overall trends show moderate adjustments for most countries, reflecting the
redistribution of trade flows and adjustments in global supply chains.
Conclusion:
The U.S.-China tariff war caused shifts in export volumes, with countries like
Vietnam benefiting significantly due to redirected demand.
This disruption reflects how trade conflicts can lead to temporary economic gains
for countries that adapt quickly to shifting trade patterns.
These export changes underscore the adaptability of global trade networks and the
ripple effects of major economic policy shifts on international trade dynamics.

ECO412 Presentation November 8, 2024 35 / 45

OMR and IMR
Overview:
Outward Multilateral Resistance (OMR) and Inward Multilateral Resistance
(IMR) quantify the global ”resistance” faced by countries in exporting and
importing goods.
In the tariff war context, these metrics reveal how policies like tariffs and NTBs
(Non-Tariff Barriers) impact a country’s trade accessibility and competitiveness.
OMR reflects export resistance influenced by international demand and trade
barriers, while IMR reflects import resistance influenced by trade policies and
agreements.

ECO412 Presentation November 8, 2024 36 / 45

OMR

ECO412 Presentation November 8, 2024 37 / 45

IMR

ECO412 Presentation November 8, 2024 38 / 45

OMR and IMR
OMR (Outward Multilateral Resistance):
The OMR graph shows a significant dip in 2019 across multiple countries, indicating
increased trade resistance at the height of the tariff war.
Countries like the United States, China, and Germany show fluctuating OMR levels,
reflecting increased trade barriers and market access challenges due to tariffs.
By 2020-2021, most countries demonstrate a recovery in OMR, with India and
Vietnam showing strong rebounds, likely benefiting from redirected demand as global
buyers seek alternatives to the U.S.-China trade corridor.
IMR (Inward Multilateral Resistance):
The IMR graph reveals similar trends to OMR, with notable increases in trade
resistance in 2019 as countries implement protective tariffs and NTBs.
The United States, as a key initiator of the trade war, shows fluctuations in IMR,
suggesting shifts in import policy.
For countries like China and Vietnam, variations in IMR reflect changes in trade
dynamics and the global reorientation of supply chains.
By 2021, IMR stabilizes for most countries, indicating an adjustment to the new trade
landscape, though higher levels for some nations suggest lasting trade war effects.
Conclusion:
The analysis underscores the direct impact of the U.S.-China trade war on global
trade resistance. Fluctuations in both metrics during the peak of the tariff war
illustrate the economic friction and market access limitations caused by policies.
OMR Trends: Countries that adapted quickly, such as Vietnam and India, benefited
from redirected demand, reducing OMR in later years.
IMR Trends: Persistent IMR levels in countries like China and the U.S. indicate that
the trade war’s effects may have long-term implications on their import landscape,
affecting future trade agreements and strategic alliances.
ECO412 Presentation November 8, 2024 39 / 45
Counterfactual Analysis

Scenario 1: Two-Way Tariff Imposition

In this scenario, both the US and China impose tariffs on each other’s goods, reflecting
mutual tariff actions. We modify the model by adjusting ∆tij to represent existing tariff
changes. This scenario evaluates:
The effects of higher two-way tariffs on trade diversion to third-party countries such
as Vietnam and Mexico.
The impact on GDP and welfare for both the US, China, and third-party countries.
The consequences for consumer welfare due to increased goods prices.

Scenario 2: One-Way Tariff Imposition

In this scenario, only the US imposes tariffs on Chinese imports, without reciprocal tar-
iffs from China. We adjust ∆tij accordingly to reflect this one-sided tariff imposition.
This scenario examines:
How US tariffs lead to trade diversion to countries like Vietnam and India.
Potential for increased Chinese exports to the US in the absence of retaliatory
tariffs.
Effects on consumer and producer welfare in the US and China.

ECO412 Presentation November 8, 2024 40 / 45

Counterfactual Analysis

Empirical Results
Exporter Year Trade Inflows (Scenario 1) Trade Inflows (Scenario 2)
China 2017 34,361,200 36,256,583
China 2018 37,498,354 39,756,225
China 2019 32,552,173 35,350,435
China 2020 39,946,464 42,349,826
China 2021 47,408,804 50,857,830
United States 2017 67,142,168 68,652,184
United States 2018 74,830,212 76,488,607
United States 2019 60,820,817 62,034,908
United States 2020 62,472,577 63,549,691
United States 2021 81,794,548 83,409,851

ECO412 Presentation November 8, 2024 41 / 45

Counterfactual Analysis

Interpretation of Results:
Trade Inflows Under Scenario 1: The reduction in trade inflows for both China
and the US in 2019 demonstrates the impact of mutual tariffs, with diverted trade
flows enhancing third-party nations’ trade shares.
Trade Inflows Under Scenario 2: The one-way tariff scenario shows marginally
higher trade inflows for both the US and China in comparison to Scenario 1, as
China benefits from continued access to the US market. This result aligns with
market substitution effects where consumers substitute higher-cost domestic
products for imported goods.
Long-Term Impact: The consistently increasing trend in Chinese trade inflows in
Scenario 2 highlights the resilience of Chinese exports when there is no reciprocal
tariff, reflecting China’s competitive pricing and production efficiency.
These results underscore the importance of strategic tariff policies, demonstrating that
while mutual tariffs can suppress bilateral trade significantly, one-sided tariffs have dif-
ferential impacts, benefiting the un-tariffed country through persistent demand in foreign
markets.

ECO412 Presentation November 8, 2024 42 / 45

Trade Agreement Impacts
Explanation of Trade Impact Indicators:
PTI (Partial Trade Impact): Measures the immediate impact of a trade agreement
on trade flows between member countries without considering broader economic
adjustments.
MTI (Modular Trade Impact): Evaluates the trade impact by segmenting the
effects of trade agreements on countries that are members (Yes) versus
non-members (No), capturing differential gains.
GETI (General Equilibrium Trade Impact): Assesses the overall impact of trade
agreements within a general equilibrium framework, accounting for indirect effects
across the economy, including changes in prices and output in response to the
agreement.
Members Coefficient PTI MTI GETI
Yes No Yes No
USMCA 1.13 3.11 2.99 2.73 3.95 3.86
RCEP 1.65 5.23 1.63 1.55 2.26 2.07
ASEAN+ -1.73 0.18 0.49 0.41 0.27 0.20
Common Border -0.21 0.81 0.89 0.79 0.96 0.88
USMCA: United States-Mexico-Canada Agreement
RCEP: Regional Comprehensive Economic Partnership
ASEAN+: Association of Southeast Asian Nations Plus
ECO412 Presentation November 8, 2024 43 / 45
Conclusion

The analysis underscores the profound impact of the US-China trade war on
global trade dynamics, illustrating how bilateral tariffs disrupt traditional trade
flows and create new opportunities for third-party nations. The imposition of
two-way tariffs has not only curtailed trade between the US and China but has also
catalyzed a reconfiguration of global trade patterns, benefiting economies like
Vietnam and Mexico that emerged as alternative sources for goods previously
exchanged between the two superpowers.
This study’s counterfactual analysis and coefficient estimations reveal that
strategic trade agreements, such as USMCA and RCEP, play a pivotal role in
buffering member nations against trade shocks and fostering resilience. The
ripple effect on GDP, welfare, and multilateral trade costs (as evidenced by OMR
and IMR) highlights the importance of adaptive trade policies to maintain
economic stability.
Overall, the findings emphasize the importance of a multilateral approach in trade
policy, where countries actively engage in agreements that enhance economic
resilience. The observed trade diversions and welfare impacts underscore the need
for cooperation and flexible policy frameworks to navigate future trade
disruptions and promote sustainable growth.

ECO412 Presentation November 8, 2024 44 / 45

 Thank You!
Alok Kumar - 210101

ECO412 Presentation November 8, 2024 45 / 45