The US-China Trade War and Brazil as Proof of Trade Redirection

When we hear of a “trade war” we often think about the countries directly involved, or those that contribute to the economic tension. Indeed, when the US and China announced escalating waves of tariffs on each other’s goods in 2018, many economists expressed that both the US and China—through a purely economic lens—could only lose from a trade war. However, we often do not realize that the aggregate effect is often much broader, and many other countries can be affected economically. I dove into this topic for my master’s thesis, examining changes in Brazilian exports in response to the tariffs imposed by the US and China on each other.

There are essentially three reasons to expect Brazilian exports would be affected by the US-China trade war: (1) as the US and China stopped importing from each other, they may have looked to import the same goods from Brazil, (2) the higher prices that the US and China paid for tariffed goods—either from each other or from a different trading partner—create economic frictions that influence demand for other goods in the global economy, and (3) the trade war was brought about amidst more sweeping efforts to promote domestic industries. The latter describes President Donald Trump’s “America First” policies, particularly regarding the American steel and aluminum industries.

The results of my study were quite interesting and largely statistically significant. For every 1% tariff increase imposed by China on imports from the US, Brazilian exports to China increased 0.135%, suggesting that China imported more from Brazil as tariffs increased on US goods. The correlation is even stronger when narrowed down to specific commodity sectors—the soybean, petroleum, machinery, and plastic and rubber sectors showed increasing exports from Brazil to China as Chinese tariffs increased on the same goods imported from the US.

A similar pattern exists with Brazilian exports to the US. For every 1% tariff increase imposed by the US on imports from China, Brazilian exports to the US increased 0.0636%, meaning that Brazilian exports to the US increased as the US increased tariffs on imports from China. The data on machinery indicate that machinery exports from Brazil to the US increased as the US implemented tariffs on machinery imports from China.

The correlation between US-China trade value and the change in Brazilian exports to the US and China also was measured. As China reduces imports from the US by $1 million, Chinese imports of the same commodities from Brazil increased 0.0424% and is statistically significant. Interestingly, however, the same pattern does not exist for the US. Instead, as US imports from China fall by $1 million, the US also reduced imports from Brazil. This may be due to Trump-imposed tariffs which apply to many countries, including China, simultaneously in an attempt to protect US industries. This also indicates a greater trade redirection affect from China to Brazil than from the US to Brazil.

Ultimately, the evidence shows that the trade war had an impact on countries like Brazil that were removed from the escalating tensions between the US and China, and it shows that the tactics used in economic diplomacy can have far-reaching consequences. One of the potential benefits of trade redirection for the US is the increase if exports from countries that use a greater proportion of American parts in their products. While China uses very few American-made components in manufacturing, other countries, such as Mexico, use a much higher proportion of American parts in production, so increasing imports from these countries may simultaneously benefit American producers. As Trump receives much of the blame for  the trade war, it will be interesting to see whether Biden revisits the Trump-imposed tariffs during his presidency.

Credit to my master’s thesis coauthors Amr Mohie El Din, Axel Roserens, and Pierre François André.