Series: Working Papers. 2634.
Author: Irina Balteanu, Maximiliano Moreno and Francesca Viani
China
- European Union
- International trade
- International Economy
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Abstract
This paper investigates whether US tariffs on China diverted Chinese exports towards the EU, exploiting the first US-China trade war as a setting that permits clean identification of trade diversion effects. Applying difference-in-differences local projections to highly disaggregated tariff, import and unit value data, it shows that trade diversion occurred but was limited in size. For each dollar reduction in US imports from China, 9 cents were redirected to the EU market in real terms. The effects varied substantially across products and destination markets. Trade diversion was strongest for complex capital goods and homogeneous intermediate inputs, and was more pronounced in EU markets with greater import exposure to China and weaker competition from alternative suppliers. Products experiencing effective diversion also exhibited significant price declines, with competitive pressures concentrated in lower-price market segments. These findings suggest that tariffs of a magnitude comparable to those imposed by the United States in 2025 could redirect Chinese exports towards the EU, potentially contributing to a second “China shock” in Europe. While the aggregate effects are modest, diversion and price pressures may be considerably stronger in specific product categories and destination markets.