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GTAP Resources: Resource Display

GTAP Resource #6597

"Trade protection and firm selection: The US protectionist trade policy"
by Li, Qiaomin


Abstract
In 2018, the US started trade war against China, imposing high tariffs against Chinese exports. COVID-19 exposes the weakness of US supply chain and its dependence on China, which tends to intensify US trade protectionism against China. Foreign invested firms in China have a high engagement in foreign trade. How will these firms react to US trade protectionism? Will firms select other locations to produce? This paper develops a firm heterogeneity CGE model to simulate the choices of foreign invested firms in terms of location by incorporating relation cost into model. Results show that trade protection would drive foreign invested firms to relocate from China to other regions. However, when considering relocation cost, the drop of foreign firm numbers is reduced. When China continuously improves business environment to reduce the cost of foreign firms in adapting to China’s market, even more firms will stay in China.
In addition, we simulate without trade war, leaving China to grow. In long run, the growth of GDP and the slow growth of population would accompany with increases of labor cost. China will gradually lose its advantage in being the “world factory”. The world supply chain would relocate to other countries along with the selection of multinational enterprises by then. China’s export to the US would drop and the dependence of US to China’s supply chain would decline simultaneously. Our simulation results suggest that trade war is not an efficient way to deal with the supply chain problem, but free trade is.


Resource Details (Export Citation) GTAP Keywords
Category: Other CGE Application
Status: Not published
By/In:
Date: 2022
Version:
Created: Li, Q. (4/15/2022)
Updated: Batta, G. (5/16/2022)
Visits: 280
- Foreign direct investment
- Asia (East)
- North America


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