We review theoretical and empirical work on the economic effects of the United States and China trade relations during the past 20 years. We first discuss the origins of the China shock and its measurement and present methods used to study its economic effects on different outcomes. We then focus on the recent US–China trade war. We review methods used to evaluate its effects, describe its economic effects, and analyze whether this increase in trade protectionism reverted the effects of the China shock. The main lessons learned in this review are that (a) the aggregate gains from US–China trade created winners and losers; (b) China's trade expansion seems not to be the main cause of the decline in US manufacturing employment during the same period; and (c) the recent trade war generated welfare losses, had small employment effects, and was ineffective in reversing the distributional effects due to the China shock.
We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world's input-output structure and world's GDP change due to changes in frictions. We derive a sufficient statistic to identify frictions from the observed world input-output matrix, which we fully match for the year 2011. We show how changes in internal frictions impact the whole structure of the world's economy and that they have a much larger effect on world's GDP than external frictions. We also use our approach to study the role of internal frictions during the Great Recession of 2007–2009.
We evaluate the quantitative effects of trade policy on the location of firms across space and over time. We develop a multi-country, multi-sector dynamic general-equilibrium trade and spatial model with forward-looking decisions of workers on where to supply labor, forward-looking decisions of firms on where to locate produc-tion, endogenous capital structure accumulation, and trade in intermediate goods with sectoral linkages. We bring the model to data using trade, production, and data on firm demographics across sector and locations. We use the model to study if trade protectionism can revert the declining trend in the U.S. manufacturing em-ployment and firms; and its impact on the location of production across space and over time. We feed into the model the raise in import tariffs between the U.S. and its major trade partners in the year 2018. We find that these changes in trade policy can result in a persistent increase on manufacturing employment and firms. However, these effects do not revert the long run decline in manufacturing employment and firms. Importantly, the relocation of production comes at the cost of higher prices, lower welfare for households, and heterogeneous effects on firm entry across space.