Weaning Away from China – Trade and Welfare Implications

Abstract

Over the past years, import dependency on China has deepened and expanded globally. Incidents such as supply chain disruptions during COVID19, due to over-dependence on a single supply source, and countries' heavy reliance on Chinese imports—often termed the “China shock”—have raised global concerns and prompted efforts to reduce dependence on China. The attempt at weaning off started in 2018 when the US imposed additional tariffs on its imports from China. Gradually, the process of decoupling from China was adopted by other economies. Despite these motivations, data show that nations continue to depend increasingly on Chinese imports. In this study, we empirically quantify trade dependence on China and estimate the costs associated with reducing such dependence using a structural gravity model of trade. We find that lowering dependence on Chinese imports reduces countries' propensity to export. Furthermore, general equilibrium counterfactual simulations show that if the US progressively reduces its import dependency on China, the welfare loss will be greater for the US than for China. The rest of the world will also suffer welfare losses as a result of US actions to restrict Chinese imports.