Econometric Evaluation of the China-US Trade War Effects

The escalating trade war between China and the United States, initiated in 2018, has significantly impacted the trade pattern of these two nations. This event can be treated as an intervention which has led to a series of retaliatory actions, resulting in substantial economic and trade frictions between the two largest economies. This paper aims to analyze the economic impacts of the trade war effects using advanced econometric techniques. Our empirical study employs panel data analysis combined with a factor model, inspired by the methodologies of Hsiao, Ching and Wan (2012) and Bai, Li and Ouyang (2014), to construct trade patterns for both China and the US. By using annual trade data from multiple countries as a control group, we construct counterfactual results for China's and the US's imports, exports, and trade balance, respectively. Under a non-stationary setting, the counterfactual results indicate a significant decline in China's exports and a notable reduction in its trade surplus with the US post-2018. Meanwhile, US imports from China decreased, aligning with the trade war's goal of reducing the trade deficit, while US exports to China unexpectedly increased, possibly influenced by the Phase One trade agreement. Furthermore, our method, compared to other approaches, demonstrates superior accuracy and reliability in illustrating the effects of the trade war.