Government Credit and Trade War

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we analyze how government-subsidized credit in China affects its exports and the economic activities in the U.S. We find that CDB credit to strategic industries at the top of supply chains leads to lower prices, higher amounts, and more product varieties and destinations of exports for firms in downstream industries. This increased import competition crowds out U.S. firms in the same industry but crowds in downstream firms regarding business performance and employment. We use the pre-determined politician turnover cycles as instrumental variables for CDB loans to identify these crowding-in and crowding-out effects. In the recent trade war with China, the U.S. government understand this trade-off and strategically raised tariffs on China's imports that compete with domestic manufacturers rather than the imports that are used as inputs for U.S. firms