Amit Khandelwal analyzes the short and long term effects of the US-China trade war


“I generally see international trade as a really important force that can drive economic development,” Khandelwal said. In particular, he is interested in the differences between how international trade affects developed and developing countries.

In the summer of 2022, Khandelwal was named a full professor at Yale Economics and the newly founded Jackson School for International Affairs, and returned to New Haven, along with his family. “He left us one of our most promising students and he came back an accomplished scholar,” said Penny GoldbergElihu Professor of Economics at Yale, Khandelwal’s former mentor and current co-author.

“IIt’s a great intellectual homecoming,” Khandelwal said, “and it’s really exciting to help build a new school and be exposed to a wider range of students.

The US-China Trade War: At Home and Abroad

Although they were at the heart of a different research project when the trade war broke out in 2018, Khandelwal and his co-author seized the opportunity to analyze the historic moment. “There was a feeling that we could say something credible and informed in real time,” Khandelwal said.

According to Khandelwal’s analysis, the progressively unfolding mutual tariff escalations marked a break in the history of large-scale American trade policy with the Smoot-Hawley Tariff Act of 1930 – a protectionist policy which, according to many economists, exacerbated the effects of the Great Depression. However, determining how these tariffs have affected short and long term savings is a difficult question to answer. Indeed, tariffs change the prices of goods at the border, which affects the behavior of consumers and producers. Since the start of the conflict in 2018, relations between China and the United States have soured under two opposing US presidencies.

In an article in the current edition of Economics Annual Review, “The Economic Impacts of the US-China Trade War”, Khandelwal, and Pablo D. Fajgelbaum review what economists have learned so far about the trade war and its effects. “One surprising thing about this trade war is that the cost has been passed on entirely to consumers,” Khandelwal said. When prices rise, businesses must choose how much of the cost to absorb and how much to pass on to consumers. This “transmission rate” is a tool that economists use to understand the effects of trade policies. For example, tariffs that are fully passed on to consumers make their situation worse, but the flip side is that they provide a shield for domestic producers. In previous tariff incidences, only about half of the tariff changes were passed on to consumers. But, for reasons that are still unclear, in the US-China trade war, it all was.

Overall, the trade war has lowered the GDP of the United States and China, but not significantly. But, due to the high rate of transmission, the trade war hurt consumers but made it better for American producers. Additionally, since different parts of the United States specialize in different industries, the impact of US tariffs and Chinese retaliation has had different impacts in different regions. For example, the Midwest, an agriculturally intensive region, has been particularly hard hit by China’s retaliation against US agriculture.

Khandelwal argued in an editorial in the FinancialTimes on June 8, 2022, that “tariffs can only help manufacturing jobs if they raise prices” and that the Biden administration should roll them back in order to fight inflation.

This analysis paved the way for an investigation into the effects of the trade war on other countries. In a work documentKhandelwal, his former Yale mentor, Penny Goldberg, and their co-authors assessed trade policies of bystander countries in response to tariff increases between the United States and China.

“I generally view international trade as a very important force that can drive economic development.” –Amit Khandelwal

The research team observed that countries had widely varying responses to the increase in tariffs on the United States and China. The answer seems to depend on how a spectator country produces goods that replace or complement the production of the countries involved in the trade war. For example, when the United States imposes tariffs on China, if an observant country like Vietnam produces a close substitute for a taxed product, it risks increasing its exports to the United States. On the other hand, if it produces a good that complements Chinese products – such as a component of a machine made in China – its exports to the United States could fall.

They found that the disparate responses of different countries do not depend on the wealth of the countries, but rather on their position as an exporter of substitute or complementary products to the United States and China and the flexibility of demand. for these products. In the interview, Khandelwal also speculated that “countries that had more trade deals in place than others tended to do a bit better, so that probably says something about how well they are able to react faster because these agreements were already in place and the companies just naturally looked at them.

The team used global commodity-level trade flows to track the reallocation patterns of the United States, China, and the “rest of the world,” finding that if the two economic superpowers reduced trade with each other, trade world as a whole was actually up 3%. Spectator countries have redirected China’s exports to the United States and increased exports to the rest of the world, resulting in what Khandelwal sees as not just a shuffling of goods, but rather a transition to new trade routes. international. Over the past decade, support for the Trans-Pacific Partnership and the African Continental Free Trade Area has grown, and Khandelwal believes new networks among low-income countries will continue to grow in the years to come.


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