In  early 2018,  an economic conflict broke out between  China and the United States, which is often referred to as the China-US trade war or the China-US trade dispute. Ever since, the trade policies of the two countries have witnessed significant changes, while the trade flow between the two countries fluctuates constantly. Research results show that in 2020, US tariffs on imports from China have increased to 21%, while Chinese tariffs on US exports have increased to 21.8%. These tariff rates are expected to increase further. On the other hand, both countries witnessed sharp decreases in exports to each other in the first quarter of 2019 (Bekkers & Schroeter, 2020). Researchers also discovered negative impacts on equity markets and large wage dispersion in tradable  sectors, while price  changes do not occur in either export or import sectors (Fajgelbaum et al., 2021). The conflict between these two large economic entities also exhibits potential effects on global trade flows. According to an estimate based on the WTO Global Trade Model (Bekkers et al., 2019), the trade conflict is estimated to reduce global GDP by approximately 1.96% in 2022 and the value of global  trade would decrease by 16.96%. It is therefore an important task among economists to investigate the relationship between constant changes in trade policies and fluctuation in trade flows during these periods, and determine the actual scale of influences caused by such trade conflicts in different economic aspects.

Due to the complicated nature and depth of topics related to international trade, researchers could base their analysis on several economic models and from different perspectives, while each might lead to different conclusions. To date, researchers have developed specific analysis on the interaction between trade policy and monetary policy and how this interaction potentially limits international welfare (Aurey et al., 2023), and have discovered evidence based on firm-level data that the China-US trade war has led to similar effects in labor markets: the amount of available job offerings was decreasing both in China (He et al., 2021) and in the US (Javorcik et al., 2022) since the beginning of the trade war. Meanwhile, one can also find general research that assesses the impact of the trade dispute with a developed economic model. For example, many analyses would utilize computable general equilibrium  models (CGE models) to investigate multiregional impacts. However, although the CGE  framework is often used in economic analysis scenarios for its simplicity, an assessment report from  the Asian Development Bank points out that “...CGE models specialize in depicting traditional production  pathways,  and  therefore  are  ill-suited  for cross-border  services  trade.”

(Gentile et al., 2020). The same report also suggests extending the work with exchange rates, as they are not included in the analysis. This work aims to fill that gap by providing general research with a framework that suits multiregional analysis, while

including the exchange rate volatility as a factor.

The thesis revolves around the following research questions: What factors have affected international trade flows  since the US-China trade war happened? How do changes in such factors influence trade dynamics between countries?

This research aims for a quantitative approach by conducting a multiple log-linear regression with the  standard  gravity model. The utilization of the  empirical  gravity model in international economic studies was pioneered by Jan Tinbergen (1962). Soon, researchers started applying the gravity model in different contexts in terms of different regions, periods, variables, and so forth. The model shows its advantages in simplicity and great compatibility, as it could directly establish links between trade flows and many variables such as economic sizes, trade costs, exchange rates, and geographical distances. A report by Leamer and Levinsohn (1995) conducted analyses on different theorems with the gravity models and suggested “They have produced  some of the clearest and most robust findings in empirical economics.” The gravity model generally develops a logarithmic linear relationship for each pair of countries in their bilateral trade flows. In most cases,    the gravity model first structures a supposed multiplicative/exponential relationship from factors, and then takes the natural logarithms of all variables to form a log-linear equation suitable for least squares regression methods. If needed, the model could also introduce dummy variables to its variable set. In our setting, we would choose data period from 2018 to 2023 and economic entities that are either directly involved (China and the U.S.), major trading partners to either (or both) of  these two previous countries (Japan, Canada, the European Union), or significant in relevant industrial supply chains (Southeast Asian countries, Mexico). The whole analysis procedure is conducted with STATA Statistical Software (release 18.0, 2023) and interpreted further with visualized results.

The gravity model analysis is a suitable method for multiregional trade relation analysis since it could help discover findings on influences from exchange rate volatilities and geographical distances. These influences would be difficult to investigate with other frameworks. As stated by a 2020 report by Bollen, Freeman & Teulings from CPB Netherlands Bureau for Economic Policy Analysis, the standard gravity models focus on 3-6 years of mid to long-term investigation, which fits our chosen period perfectly; moreover, this framework can be supplemented with results yielded by other research models and frameworks. This could provide insights into mechanisms outside the gravity model’s focus and provide a more comprehensive view.

The bachelor thesis consists of six sections. Following this introduction, section two concentrates on literature reviews of changes in trade policies during the trade war and their related influences. The third section provides a thorough theoretical explanation of the gravity model’s structure and all data used. Section four focuses on the equilibrium analysis in three steps: construction of the baseline model, insertion of further variables and factors, and transformation into a regression-ready formulation. Speculation on results follows in the fifth section with supplemented comparison to other research results.  Finally, in section six, the research concludes by providing answers to the research questions, discussing the research process,   and offering suggestions for possible extensions based on the findings.

References

Aurey, S., Devereux, M. B., & Eyquem, A. (2023). Trade Wars, Nominal Rigidities and Monetary Policy (NBER Working Paper NO. 31302). National Bureau of

Economic Research.

https://www.nber.org/system/files/working_papers/w31302/w31302.pdf

Bekkers, E., & Schroeter, S. (2020). An Economic Analysis of the US-China Trade

Conflict (WTO staff working papers ERSD-2020-04). World Trade Organization (WTO), Economic Research and Statistics Division.

https://www.wto.org/english/res_e/reser_e/ersd202004_e.pdf

Bekkers, E., Teh, R., Fontagne, L., Fouré, J., Hoekman, B., Koopman, R., Nelson, D.,  Nicita, A., & Olarreaga, M. (2019). Potential Economic Effects of a Global Trade Conflict (WTO staff working papers ERSD-2019-04). World Trade Organization  (WTO), Economic Research and Statistics.

https://www.wto.org/english/res_e/reser_e/ersd201904_e.pdf

Bollen, J., Freeman, D., & Teulings, R. (2020). Trade policy analysis with a gravity model (CPB Background Document). CPB Netherlands Bureau for Economic   Policy Analysis.

https://www.cpb.nl/sites/default/files/omnidownload/CPB-Background-Document- July2020-Trade-policy-analysis-with-a-gravity-model.pdf

Fajgelbaum, P., Khandelwal, A., Princeton, N., & Columbia, N. (2021). The Economic Impacts of the US-China Trade War. Annual Review of Economics, 2022, 14:205- 228.https://doi.org/10.1146/annurev-economics-051420-110410

Gentile, E., Li, G., & Mariasingham, M. (2020). Assessing the Impact of The United

States-People’s Republic Of China Trade Dispute Using a Multiregional

Computable General Equilibrium Model (ADB Economics Working Paper Series

NO. 620). Asian Development Bank.

https://www.adb.org/sites/default/files/publication/640651/ewp-620-impact-us-prc- trade-dispute.pdf

He, C., Mau, K., & Xu, M. (2021). Trade Shocks and Firms Hiring Decisions: Evidence from Vacancy Postings of Chinese Firms in the Trade War. Labour Economics, 71, 102021.https://doi.org/10.1016/j.labeco.2021.102021

Javorcik, B., Stapleton, K., Kett, B., & O'kane, L. (2022). Did the 2018 Trade War Improve Job Opportunities for US Workers? (WBG Policy Research Working Paper 10249). Wolrd Bank Group, Development Economics, Development

Research Group.

https://documents1.worldbank.org/curated/en/099421212012251677/pdf/IDU0500 ae4fa0848304bab089c9089e7cdc8970e.pdf