With the rise of protectionism from the year of 2018, the Trump Administration has adopted a series of actions to impose Section 301 tariffs on goods imported from China to the U.S. The goods are subjected to 15% to 25% of additional tariff rates, affecting total import value of $450 billion. The sudden change in the United States international trade policy in the late 2018 created an opportunity to examine the impact of tariffs’
implementation on trade. Nicita (2019) finds that, in the first half of 2019, the U.S. has a 25% reduction in imported goods as a result of the imposition on additional tariffs.
Several researches are conducted to evaluate the impact of the U.S.-China trade war.
Amiti, Redding, and Weinstein (2019) estimate an additional $12.3 billion cost of the tax revenue to the government on domestic consumers and importers, and, this additional cost could transfer from the tariffs into U.S. domestic prices. Nicita (2019) also finds that the additional tariffs rates result in a strong decline in U.S. imports from China with an indication to replace imports from other places and an 8% of absorbed cost of tariffs from the reduction of export prices.
Because of the relative change in the U.S. domestic prices, the imports from China could deflect from other exporting countries instead of China to avoid the imposition of additional tariffs. Taiwan is the top five alternative importing markets for the U.S.
Under the U.S.-China trade war, Taiwan has majorly $474.76 million of export value into the U.S. for electrical equipment (HS 2-digit=85), $5.95 million for special textile (HS 2-digit=58), and $76.84 million for reticles of iron or steel (HS 2-digit=73) (Tu, Du, Lu, & Lou, 2020). The exporting goods in Taiwan are mainly high-technological or electrical products. With small gross weight and volume, these products usually have higher added-value that is exactly the ideal goods for the air transportation. In addition, due to the almost-immediate implementation after the official announcement was
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released, air transportation and air freight will have a prompt response to the additional tariffs rates. The just-in-time operation for the global value-chain heavily relies on the rapid and reliable air transportation links (Geloso Grosso & Shepherd, 2011). Therefore, the underlying impact for air freight is essential to be examined in detail for estimating the magnitude of trade deflection under the U.S-China trade war.
In the last decade, the liberalization of trade and aviation industry has made air freight an important channel for global trade to stimulate the growth of the world economy and globalization. The global freight tonnne-kilometers (tkm)1 have grown 39% from 2008 to 2018 according to the World Bank database. Even though the cost for air freight is typically higher and acts as a limitation of air freight, in 2014, air freight still accounts for 34.6% of world trade ($6.4 trillion USD) while only constitutes 0.5%
of total trade volume (International Air Transportation Association (IATA), 2018).
Moreover, along with the development of e-commerce, air freight is acting as a driver of international connectivity. Aviation trade, with the prosperity of international trade, is expected to share 96% of Air e-commerce in mail tonne-kilometres (mtk)2 in 2025 (Industry High Level Group (IHLG), 2019). Similarly, in Taiwan, the air freight trade volume in the proportion of total trade volume is also extremely little. According to an analysis conducted by the Taoyuan International Airport Corporation in 2017, with only 0.13% and 1.54% of imports and exports weight volume, their trade value account for 43.78% and 48.8% respectively (Taoyuan International Airport Corporation, 2018).
Although with a low proportion of volume, the larger proportion of value shows how air freight trade is essential to a country’s economic and trade development.
1 Tonne-kilometers (tkm) is a unit of measure of freight transport which represents the transport of one tonne of goods (including packaging and tare weights of intermodal transport units) by a given transport mode (road, rail, air, sea, inland waterways, pipeline etc.) over a distance of one kilometer.
2 Mail tonne-kilometres is obtained by multiplying the total number of tonnes of mail revenue load carried on each sector of a flight by airport-to-airport distance.
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This study aims to investigate the trade deflection and creation effects in Taiwanese air freight under the United States-China trade war. The fact that the tariffs were imposed in different phases with specific products on a single country allows this study to specifically look into imports and exports of products based on air freight category transported by air. In addition, to provide a straightforward aspect of trade value, the unit value will be used. This study uses regression analysis to estimate the effect of the trade deflection and creation on Taiwan’s air freight under U.S.-China trade war. The data of air freight volume and value, in the period between April, 2010 and November, 2019, is examined for comprehensive estimation of the trade deflection and creation effects under the U.S.-China trade war. To control for the category and time, the fixed effect model is applied. With the robustness check, interaction terms of top-5 major goods and time trend for each air freight category as well as the dummy of dynamic effect are added. Additionally, also with dummy, the leading and lagged effects are examined in case the effect had happened before or after the imposition of tariffs.
In the following sections, in section 2, the paper provides a general overview of the United States-China trade war. Also, I will explain the basic concept of the trade deflection and creation effects on a theoretical basis. In section 3, the data and data sources will be described. Section 5 provides the econometric models used to estimate the effect of additional tariffs rates on trade deflection by imports and trade creation by exports. In section 6, the results will be presented to examine the direction and the magnitude of trade deflection and creation effects under the U.S.-China trade war.
Lastly, section 7 concludes.
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2.1 Overview of United States-China Trade War
The U.S. and China are the leading powers in the world when it comes to economies. Since China’s economic growth is soaring under globalization, the Goldman Sachs had estimated that China would surpass the U.S. in late 2020s. It leads to those trade actions, involving international trade prospects amid rising U.S.
protectionism (Steinbock, 2019). The “American First” further became the catchword for protectionism rising in recent years to oppose the exports-leading trade policies by China. After the withdrawal from the Trans-Pacific Partnership (TPP) and the intention of NAFTA renegotiation, the direction had been tilted toward the country specific tariffs.
In the second half of 2018, China and the United States have been confronting a trade conflict when the Trump administration implemented tariffs lists on approximately $360 billion of U.S. imports from China. To respond to the protecting trade policy of the U.S. with retaliation, averaging tariffs of 16% has been imposed by China on $161 billion of U.S. exports (Amiti et al., 2019). These competitively retaliating tariffs policies are commonly addressed as “trade war”.
Table 1, organized from the Office of the U.S. Trade Representative, shows the comprehensive time of release and implementation as well as estimated trade value from China for the four tariffs lists conducted by the Trump administration. Note that the tariffs rates of the third list were changed, and part B of the fourth list was suspended.
The U.S. trade action lists are announced consecutively between June 2018 and August 2019. The first tariffs list (L1) specifically for China began in June, 2018, with additional 25% tariffs rates estimated for $34 billion of imports value. The second tariffs list (L2) of additional 25% tariffs rates have $16 billion of imported China goods.
The third list of tariffs implementation started in September, 2018 with 10% tariffs