Bilateral Tensions, Global Supply Chains, and U.S.-China Trade Relations

• In Event: Politics of the U.S.-China Trade War

Abstract

This paper develops a measure of geopolitical and economic tensions in U.S.-China relations based on the sentiment expressed in major U.S. news media and utilizes it to analyze the impact of bilateral tensions on monthly trade volumes between the two countries between 2002 and 2019. Panel vector autoregressive (PVAR) model estimates suggest that bilateral tensions do affect trade relations in the short-term. However, there do not seem to exist any substantial differences in the sensitivities to tensions for industries with varying levels of supply chain linkages to China during the sample years. Further analyses show that rising bilateral tensions as well as the imposition of large-scale tariffs on China since the beginning of the trade war have had more limited impact on the imports of U.S. industries with more extensive supply chain linkages to the Chinese market. These results indicate that fluctuations in routine bilateral relations may not be sufficient to provoke divergent industry responses and that it may take conflicts at higher levels such as those under trade war conditions for us to observe any noticeable differences in industries’ reactions. They further suggest that considerations of “sunk costs” may mediate the impact of political tensions on market transactions.

Authors

• Ka Zeng, University of Arkansas, Fayetteville

• Rob Wells, University of Arkansas

• Austin Wilkins, University of Arkansas