School of International Trade and Economics, University of International Business and Economics, School of Economics and Management, Tsinghua University
Summary:
The expansion of imports is one of the key determinants leading to changes in China's economic growth patterns and influencing China's development of macro-and micro-policies. Due to a series of import-promoting policies, the value of China's 2018 imports was $2.14 trillion, exceeding the value of 2001 imports by 8.77 times. However, China faces profound changes in the international environment. For example, U.S. trade protectionism affects the production and operation of Chinese enterprises. To safeguard the World Trade Organization (WTO) regime and China's legitimate rights and interests, China imposes retaliatory tariffs on U.S. products. It is still unknown whether U.S. exports to China are significantly decreased by the shock of retaliatory tariffs, and whether China's total imports and domestic production chains are affected by the tariff shock. Discussion of the above issues not only helps China deal with the complexities of U.S. protectionism, but it also provides important theoretical guidance for further relaxation of import restrictions. In this paper, we use the multiple-period difference-in-differences method to investigate the effects of Chinese retaliatory tariffs on U.S. products. First, we discuss the effects on imports from the U.S. The identified effects satisfy statistical robustness conditions, including the parallel trend test and the placebo test. Second, we explore the effects of retaliatory tariffs on total imports from all over the world, including the diversion of import origins from the U.S. to other countries. Third, we explain the impacts of tariff shocks from the perspective of upstream and downstream connections. Furthermore, we include heterogeneity analyses regarding import demand elasticity, technology complexity, and enterprise ownership. Our monthly trading data from January 2017 to June 2020 are provided by the China General Administration of Customs. As enterprise names and ID codes are not included in the dataset, we aggregate the transaction data into imports at the HS8 product level. The data regarding China's additional import tariffs on U.S. products come from the official website of the Ministry of Finance of China. These data include the list of HS8 products that are subject to additional tariffs, the list's date of publication, and the effective dates of the additional tariffs. The data regarding the U.S. additional import tariffs on Chinese products come from the website of the Office of the United States Trade Representative. We match the Chinese HS8 product codes with both the U.S. product codes and the Chinese industry codes of input-output table. First, we find that China's retaliatory tariffs on U.S. products initially cause a significant decrease in the total value and quantity of imports from the U.S. However, the decline in imports becomes less rapid after implementation of the tariff exclusion list. Second, China's total imports and domestic production chains are not significantly affected, meaning that the negative effects of retaliatory tariffs are generally controllable. China's imports from the U.S. are replaced by imports from larger trade partners, with the support of Chinese most-favored-nation (MFN) tariff reductions. Third, although China imports of flexible products, non-fuel primary products, high-tech products, and private enterprises from U.S.are affected by the retaliatory tariffs against the U.S., the total imports of these products and enterprises are not significantly affected. Therefore, China's overall trade environment remains stable and positive. Our conclusions have important policy implications. First, China's retaliatory tariffs cause precise and powerful local impacts on U.S. exports, and thereby encourage the U.S. to abide by the applicable WTO rules. Second, it is necessary to mitigate the negative impacts of retaliatory tariffs through supporting government actions, such as accelerating the release of tariff exclusion lists and using tax incentives, subsidies, and financial supports to decrease the costs of intermediate inputs. We contribute to the literature on three grounds. First, compared to the numerical simulation data used in most of the literature, we use actual data from China's imports and lists of products subject to retaliatory tariffs. Second, we discuss the effects of retaliatory tariffs on imports from the U.S. and the rest of the world, and our consideration of import diversion helps explain the local and overall effects of the tariffs. Third, we investigate the effects of upstream and downstream tariff shocks and include heterogeneity analyses across different industries and enterprises. In the long term, trade frictions between China and the U.S. will impact the stability of China's industrial production chain, its industrial transformation, and the upgrading and innovation of Chinese enterprises. These topics will need to be further explored in future research.
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