Upstream propagation of the U.S.-China trade war

This paper examines upstream propagations of the U.S.-China tariff war in 2018-2019 through the lens of exports from 32 countries to China. Building an industry-country specific measure of input-output linkages with China, we obtain new empirical evidence that the U.S. tariffs on Chinese imports had a significant adverse effect on third countries by dampening Chinese demand for foreign inputs. A one standard deviation rise in this upstream shock leads to a decline in the growth rate of exports to China by 2.6 percentage points. A quantification exercise shows that the upstream propagation of U.S. tariffs has reduced the growth rate of GDP by 0.06 percentage points on average for these countries between April 2018 and September 2019. Firm-level analysis using a panel of Korean manufacturers, the largest exporters to China, lends further support to the importance of this vertical linkage channel