The ‘bystander effect’ of the US-China trade war - CEPR

The US-China trade war, initiated in 2018, had far-reaching consequences that extended well beyond the two primary nations involved. A study from the Centre for Economic Policy Research (CEPR) highlights what it terms the "bystander effect," where third-party countries were significantly impacted by both trade diversion and broader trade disruptions. This analysis, covering the period of 2018-2019, reveals how global supply chains shifted in response to the imposition of US tariffs on Chinese goods and Chinese retaliatory tariffs on US goods.

One major outcome observed was significant trade diversion. United States (US) importers, seeking to avoid the additional costs imposed by tariffs on Chinese goods, shifted their sourcing to suppliers in other countries. During this period, economies such as Vietnam, Mexico, Taiwan, and South Korea experienced notable increases in their exports to the US. These "bystander" economies often stepped in to fill the void left by reduced Chinese exports, demonstrating their capacity to produce similar goods or benefiting from geographical proximity and existing trade relationships.

While some countries benefited from this trade diversion, the overall impact on bystanders was complex and not uniformly positive. The study also observed shifts in China's import patterns, as Chinese importers sought alternatives to US goods affected by retaliatory tariffs. For example, some European Union (EU) countries saw increased exports to China in certain sectors. However, the broader trade disruptions and uncertainties created by the trade war also led to a general slowdown in global trade for some products, negatively affecting other bystander economies or specific sectors within them. The net effect on the EU, for instance, was mixed, with some gains in specific product categories offset by overall trade contraction and uncertainty.

The findings from the CEPR study underscore the dynamic and interconnected nature of global trade. For importers, customs brokers, and trade compliance officers, this research highlights the critical need for robust supply chain resilience and diversification strategies. It is essential to continuously monitor international trade policies, geopolitical developments, and potential tariff actions, as these can rapidly alter sourcing landscapes. Proactive evaluation of existing supply chains and exploration of alternative sourcing regions can help mitigate risks associated with trade disputes and capitalize on emerging opportunities from trade reallocations.