Impact of China–U.S. Trade Tensions on China’s Exports and Employment

Description

Trade tensions between China and the U.S. have escalated since the trade war began in 2018, and there is no evidence they are easing. There are two key aspects to the escalation in trade tensions: increases in bilateral trade barriers and increases in trade policy uncertainty. Much research on the trade war has investigated either the effects of trade barriers, especially tariff barriers, or the effects of policy uncertainty. So far, few papers have quantified both aspects within a unified framework. Hence, the combined effects of the two aspects remain uncertain, and the relative importance of each aspect remains unclear. The first aim of this proposed project is to fill this knowledge gap by developing and calibrating a dynamic general equilibrium model of international trade with heterogeneous firms and stochastic trade policies to interpret and quantify the effects of increased trade barriers and increased policy uncertainty on exports from China and employment within China.In addition to integrating of trade barriers and trade policy uncertainty, another major innovation of the proposed framework is that it allows for the existence of labor adjustment frictions across firms, which is often missing from existing workhorse models of international trade. It is important to consider such frictions for exports and employment. Recent research co-authored by the Principal Investigator has shown that labor adjustment costs affect export dynamics of Chinese manufacturing firms significantly, implying that trade tensions can directly affect firms’ labor decisions, which in turn affects export decisions. Therefore, without taking into account labor adjustment costs, the impact of trade tensions on export and employment will be underestimated. The second aim of this proposed project is to quantify the role of labor adjustment costs in the impact of trade tensions on exports and employment and evaluate the effect of potential labor market deregulation policies in mitigating the impact of trade tensions.This project will have substantial implications. First, it will improve understanding of the short- and long-term impacts of the trade war on China’s economy and particularly on exports and employment. Second, it will improve understanding of the interactions between exports and labor inputs, thereby enabling the government to implement more efficient trade or labor market policies to mitigate trade war effects. For example, if this study reveals that labor adjustment frictions significantly amplify the effect of the trade war, the government could implement relevant deregulation policies to decrease labor market frictions.