We review theoretical and empirical work on the economic effects of the United States and China trade relations during the past 20 years. We first discuss the origins of the China shock and its measurement and present methods used to study its economic effects on different outcomes. We then focus on the recent US–China trade war. We review methods used to evaluate its effects, describe its economic effects, and analyze whether this increase in trade protectionism reverted the effects of the China shock. The main lessons learned in this review are that (a) the aggregate gains from US–China trade created winners and losers; (b) China's trade expansion seems not to be the main cause of the decline in US manufacturing employment during the same period; and (c) the recent trade war generated welfare losses, had small employment effects, and was ineffective in reversing the distributional effects due to the China shock.
We review theoretical and empirical work on the economic effects of the United States and China trade relations during the past 20 years. We first discuss the origins of the China shock and its measurement and present methods used to study its economic effects on different outcomes. We then focus on the recent US–China trade war. We review methods used to evaluate its effects, describe its economic effects, and analyze whether this increase in trade protectionism reverted the effects of the China shock. The main lessons learned in this review are that (a) the aggregate gains from US–China trade created winners and losers; (b) China's trade expansion seems not to be the main cause of the decline in US manufacturing employment during the same period; and (c) the recent trade war generated welfare losses, had small employment effects, and was ineffective in reversing the distributional effects due to the China shock.
We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world's input-output structure and world's GDP change due to changes in frictions. We derive a sufficient statistic to identify frictions from the observed world input-output matrix, which we fully match for the year 2011. We show how changes in internal frictions impact the whole structure of the world's economy and that they have a much larger effect on world's GDP than external frictions. We also use our approach to study the role of internal frictions during the Great Recession of 2007–2009.
This chapter reviews a recent body of theoretical and empirical work that studies the normative and positive aspects of trade policy. We start by presenting reduced-form evidence of the effects of trade policy in the presence of supply-chain linkages, on the short-run and persistent effects of trade policy across local labor markets, and on the effects of trade policy uncertainty on employment and firms. We describe the shift-share method for trade policy analysis, discuss the interpretation of the estimated effects, and provide a theoretical foundation. We then describe new quantitative frameworks, methods, and data used to study the aggregate and distributional effects of trade policy in general equilibrium. We discuss how to take into account supply-chain linkages, local labor markets, and different sources of dynamics. As an illustration, we quantify the aggregate and distributional effects of the 2018 trade war between the United States and its trading partners. Finally, we present recent theoretical insights on optimal unilateral trade policy with firm and product heterogeneity in the context of large and small open economies with perfectly and imperfectly competitive product markets. We also discuss how optimal trade policy is shaped by the presence of multiple sectors, intermediate goods, and supply-chain linkages. We close the chapter by discussing the scope of future research.
We build a multicountry dynamic general equilibrium model to study the economic effects of the 2004 enlargement of the European Union. In our model, trade is costly and households of different skills and nationalities face costly forward-looking migration decisions. We exploit the timing of migration policy changes to identify the changes in migration costs. We find that the changes in migration and trade policy resulted in aggregate welfare gains but with heterogeneous effects across skill groups. We study the interaction between trade and migration policies and highlight the importance of trade for quantifying the welfare and migration effects of labor market integration.
We evaluate the quantitative effects of trade policy on the location of firms across space and over time. We develop a multi-country, multi-sector dynamic general-equilibrium trade and spatial model with forward-looking decisions of workers on where to supply labor, forward-looking decisions of firms on where to locate produc-tion, endogenous capital structure accumulation, and trade in intermediate goods with sectoral linkages. We bring the model to data using trade, production, and data on firm demographics across sector and locations. We use the model to study if trade protectionism can revert the declining trend in the U.S. manufacturing em-ployment and firms; and its impact on the location of production across space and over time. We feed into the model the raise in import tariffs between the U.S. and its major trade partners in the year 2018. We find that these changes in trade policy can result in a persistent increase on manufacturing employment and firms. However, these effects do not revert the long run decline in manufacturing employment and firms. Importantly, the relocation of production comes at the cost of higher prices, lower welfare for households, and heterogeneous effects on firm entry across space.
We develop a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade. The model captures the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model and take the model to the data without assuming that the economy is at a steady state and without estimating productivities, migration frictions, or trade costs, which can be difficult to identify. We calibrate the model to 22 sectors, 38 countries, and 50 U.S. states. We study how the rise in China’s trade for the period 2000 to 2007 impacted U.S. households across more than a thousand U.S. labor markets distinguished by sector and state. We find that the China trade shock resulted in a reduction of about 0.55 million U.S. manufacturing jobs, about 16% of the observed decline in manufacturing employment from 2000 to 2007. The U.S. gains in the aggregate, but due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.