ESCAPING THE

TRADE WAR
Finance and Relational Supply Chains in
the Adjustment to Trade Policy Shocks

International Economics
Group Presentation
 Overview
1 . Introduction
2 . A model of Export Retaliation
Group Members:
3 . Context and Data Sources Ruslan Bashkayev

4 . The Direct and Indirect Effects of Zeno Severini

Aliya Cisya Rani
Retaliatory Tariffs on US Exports
Naoto Carmine Napolitano
5 . Mechanism Truc Mai

6 . Conclusion
Abstract
We will see how the reallocation
works under the Trade war conditions

How industries with a strong leverage

managing new tariffs

How it impact the world export and

import
1. Introduction
Why the war started?
• US trade deficit
• Accusations of unfair trade
practices
• Government support for Chinese
companies
• US protectionist policies
• Technological rivalry
World trade
reallocation
we show there is a large degree of heterogeneity in the impact
of tariffs across both destinations and sectors. The effect of
Chinese and Canadian tariffs on trade volumes was at least
twice as large as the effect of tariffs imposed by the European
Union. At the same time, retaliatory tariffs led to a larger decline
in exports of industrial supplies followed by agricultural goods
and consumer goods.
World trade
reallocation
This document the mechanisms that explain both the direct effect
of retaliatory tariffs and the reallocation effect. To examine the role
of financial conditions, we construct industry-level leverage ratios
from COMPUSTAT during the period prior to the trade war.
Consistent with our model, we find that in high-leverage industries,
Chinese tariffs lead to a larger decline in exports to China and a
larger increase in exports to the rest of the world
Papers related to the war
Fajgelbaum et al. (2020) and Amiti et al. (2019)
(Cavallo et al., 2021)
(Flaaen et al., 2020)
Handley et al. (2020)
Waugh (2019)
Benguria and Saffie (2021)
Benguria et al. (2022)
Fajgelbaum and Khandelwal (2022)
Almunia et al. (2021)
Previous experiences
Our result that industries with high financial leverage face a
larger decline in exports to retaliating countries connects
our work to evidence on the role of leverage in other
contexts
Kalemli-Özcan et al. (2022)
Giroud and Mueller (2017)
(Chor and Manova, 2012; Levchenko et al., 2010, 2011; Ahn et
al., 2011; Benguria and Taylor, 2020).
 2. Model of export reallocation
This model explains how the American export organizations reacted to the
increase of China’s tariffs, reallocating their exports towards new markets.

09
 2 key assumptions:
- markets: China (CHN) and rest of the world (ROW)
- increasing marginal costs: different from the
standard model (Meltiz 2003). Assumption that
marginal cost increase with the production.
This means that the markets are interdependent
because an increase in tariffs increases in a market
increases the marginal cost and so the exports
towards the other market.

An increase in the Chinese tariffs reduces the exports towards China, diminishing
the marginal and so making the company more competitive in the ROW market.
This expressions show how export revenue from each market depends on the
demand level and the tariff in both markets.
 2.2 Firm to firm trade
Exporting companies sell different intermediate inputs to producers of final goods
that in end sell differentiated products to consumers both in China and ROW.
Firms have to sustain fixed cost for the exports and for each commercial
relationship they have.
=> exporting companies are more likely to trade with more productive importers
because higher productivity=larger demand for exporting firms.

2.3 Financial constrains

Exporting firms have a working capital requirement  they need to borrow
funds to finance of their fixed cost before starting their production. (Manova,

05 2013)
The need for working capital is often financed with debt, which is reflected in
a higher leverage ratio (debt/equity).
Implication of A high leverage ratio increases fixed costs due to interest on debt.
financial An increase in tariffs reduces the profits of exporting companies.
Companies with a high leverage ratio, having higher fixed costs,
constrains are more vulnerable to profit reductions caused by tariffs.

Companies with a high leverage ratio, when facing high tariffs, may:
Reduce exports to countries that impose tariffs.
Consequences Sever trade relations with unprofitable importers.
for the business Redirect exports to alternative markets.

A Chinese company with a high leverage ratio that produces electronic

components for the United States may have to reduce production or lay
Examples off employees due to tariffs imposed by the United States.
An American farm with a high leverage ratio that exports soybeans to
China may have to sell at lower prices or grow less profitable crops due
to Chinese tariffs.
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2.4 Relationship stickness
Other than the fixed cost a firm incurs in additional
costs when terminating the relationship with an
importer.
The presence of this cost is what makes a
relationship “sticky” => exporter companies are
reluctant to close the realationships due to the
cost.
 Impact on tariffs Effects on export
An increase in Chinese tariffs the effect of Chinese tariffs on US exports is
reduces the profits generated inversely proportional to the closing cost.
from a trade relationship with a
Chinese importer. A high closing cost (high stickiness)
makes companies less likely to terminate
In the absence of a closing cost, trade relationships, even if they are
exporting companies would unprofitable due to tariffs resulting in the
immediately terminate decline in exports to China will be smaller
unprofitable relationships. in sectors characterized by high
relationship stickiness.
The presence of a closing cost
makes this decision more Conversely, the decline in exports will be
complex. greater in sectors with low stickiness, where
companies are freer to terminate
unprofitable relationships.

7
 2.5 Product Differentiation
(elasticity of substitution)
The role of the elasticity of substitution in the case for an increasing
marginal cost is proposed as follow

Sectors with high elasticity of substitution (less differentiated

goods) see sharper declines in exports to China when tariffs
increase.
Conversely, these sectors see larger export increases to the rest
of the world.

Implications: Products with higher substitutability are more

sensitive to trade policy changes.

05
 The 2018-2019 trade war
3. Context 2017

and Data
Global safeguard Tariff

Sourcing
2018
April: US imposed new trade barriers focused exclusively on China covering
$50 billion in the first round
China retaliated with tariffs targeting an equivalent amount in US goods with a
25% rate.
September: Broader US tariffs at a 10% rate covered $200 billion in imports.
China responded with $52 billion in tariffs at 5% and 10% rates, mainly
targeting industrial supplies (46%) and capital goods (42%).

2019
May: US increased tariffs on $200 billion of Chinese imports.
June: China raised tariffs on part of its earlier $52 billion round.
September: US imposed tariffs on $112 billion worth of goods, as part of a
broader $300 billion plan.
China retaliated with tariffs on a $57 billion list. Phase One Agreement:
Prevented enactment of the second part of tariff lists later in 2019.
3.
Dataset: January 2015 – August 2019.

Focus: Monthly US exports, retaliatory tariffs, and product characteristics.

Context Monthly US Exports Product Characteristics

and Data Source: Census Bureau (US Exports of

Merchandise).
Categories: Industrial supplies,
capital goods, food/agriculture,

Sourcing
consumer goods.
Product-level details (10-digit HS),
aggregated by destination and Leverage Ratios: calculated using

(cont.)
month. COMPUSTAT data for 2012 - 2026

Stickiness: Trade relationship

durations (European customs data).
Retaliatory Tariffs
Combines MFN and retaliatory tariffs Product Differentiation: Classified as
from China, EU, Canada, and others. differentiated/non-differentiated
(Rauch, 1999).
Standardized at the 6-digit HS level
for consistency.
3. Context and Data
Sourcing (cont.)

Trends in US Exports (2017-2019)

Global exports: +8%; Exports to China: −12.1%.
Declines in:
Industrial supplies (−27.0%).
Consumer goods (−13.6%).
Agricultural goods (−10.9%).
Capital goods: +2.1% increase
4. The Direct and Indirect Effects
of Retaliatory Tariffs on US Export

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4.1 Direct Effect
The impact of retaliatory tariffs on
US exports to retaliating countries
 4.1 Indirect Effect
We have an examination of the reallocation of US
exports from countries that impose retaliatory tariffs, in
particular about China towards other countries, that
happened gradually over time.
Differences between US and China:

Retaliatory tariffs have a negative impact on US exports to the rest of the world
Retaliatory tariffs have a positive impact to the rest of the world in response to Chinese tariffs
So when there is an increase in Chinese tariffs, US exporters need to enter new markets with their
products or to export more frequently in existing markets
 4.2 Total impact of retaliatory
tariffs on US exports
Product-level regression caused by the impact of
retaliatory tariffs on US exports:

RESULT
not significant, close to 0, so US exporters reallocate the
7 05 exports lost in retaliating countries
 5. Mechanisms
Key determinants behind the impact of Chinese
tariffs on US exports to China:
Financial constraints
Degree of stickiness in trading relationships
Degree of product differentiation

5.1 Financial conditions

Financial conditions have an important role in the redirection of
exports toward alternative markets
In high-leverage sample, there is an increase in exports to the
rest of the world as a result of Chinese tariffs
No relevant reallocation in the low-leverage sample
External finance dipendence
and trade credit
Industries with high external finance dipendence:
Decrease in exports to China
Increase in exports to the rest of the world

Industries with low levels of trade credit have the same results as in
industries with high leverage or high external finance dipendence
5.2 Stickiness of trade relationships
The types of trade relationship held by exporting and importing firms is
also an important factor sharping the response of US exports

07
 China’s retaliatory tariffs and US
exports to China
Relationship stickiness refers to the difficulty and cost
of termination business relationships. Higher
termination costs lead to "stickier" relationships.

In industries with low stickiness, U.S. exporters facing

Chinese tariffs were more likely to end relationships,
resulting in a significant decline in exports to these
industries.

Meanwhile, industries with high sticky relationships

have less decline in exports.
 China’s retaliatory tariffs and US
exports to the rest of world (ROW)

The model assumes increasing marginal costs of

shifting exports to alternative markets. This means
that reallocating exports becomes more expensive
as the shift increases.

Industries with low relationship stickiness

experience larger declines in exports to China,
leading to a greater increase in exports to the rest
of the world compared to industries with high
stickiness.
 China’s retaliatory tariffs and
US exports to China:
Relationship stickiness and
related party trade.
The model suggests that arms-length
trade is more affected by relationship
stickiness compared to related-party
trade

In industries with low related-party trade,

relationship stickiness is highly significant.

Meanwhile, in industries with high related-

party trade, relationship stickiness is less
revelant
 5.3 Production
differentiation
Non-differentiated products are
more vulnerable to tariffs but also
show stronger reallocation to
Differentiated products are
alternative markets.
more resilient to tariffs and less
likely to experience reallocation.

05
 5.4 Comparing the In addition to leverage ratios, relationship
stickiness and product differentiation, we

mechanisms consider the following.

Contract quality
inventories upstreamness
intensity ladders

Play a critical role in Highlight the position of Industries with strong Provide a measure of vertical

sharping the response of exporters within supply contractual ties may be differentiation, helping us

trade flows chains, offering insights less reliant to break understand how industries

into their resilience relationships adapt to changing market

demands
 The study examines how changes in Chinese
tariffs in 2017 and 2019 affected
WithU.S.
highexports to China.
relationship stickiness,

The analysis covers January–

August 2017 and January–August
2019. Exports and tariffs are
aggregated at the HS10 product
level for these periods, with

differences computed as log

differences.

RESULT: Leverage ratios and relationship

stickiness significantly affect the impact of tariffs.
 6. Conclusions
Total Effect of Retaliatory Tariffs: retaliatory tariffs significantly reduced U.S.
exports to the imposing countries. However, this was partially mitigated by a
noticeable reallocation of exports to other markets.

Determinants of Export Impact:

Financial Conditions
Relationship Stickiness

Theoretical Consistency: The findings support a model where finance and

relationship stickiness shape export responses to tariffs.
THANK YOU
For the Attention