Withering globalization? The Global Value Chain effects of trade decoupling

The paper analyses the interindustry spillover effects of bilateral trade conflicts using the example of the 2018-2019 China-USA bilateral trade war. Empirical results are produced using a new heuristic method based on hypothetical extraction and substitution in an International Input-Output model. This model tracts a series of direct and indirect sectoral effects and provides an intuitive and computationally tractable way of mapping the potential gains and losses affecting other trade partners. It sheds light on some intricate inter-industry implications that are not obvious when considering traditional trade models. A large share of the negative impacts may be felt by third countries through two separate trade channels. Firstly, because the production of a final product in one country relies on importing intermediate goods from other trade partners, who may be negatively impacted by the trade destruction effects of the trade embargo. Secondly, because trade embargoes lead to trade substitution in order to fill the gaps left by embargoed products, and to trade deflection. Deflection occurs when the trade belligerents redeploy their unsold exports towards third countries, increasing competition for market shares. This situation is an additional threat for the Multilateral Trade Governance as large-scale trade deflection may induce a cascade of Tit-for-Tat protectionist measures, in a situation where the COVID-19 pandemics has fanned the industrial nationalism, trade protectionism and geo-political tensions which were already perceptible since the global crisis of 2008-2009.