Mediation Analysis of the China-US Trade War Effects

This paper examines the indirect effects of the China-US trade war on bilateral trade balances using a modified mediation analysis that incorporates lagged mediators. By allowing mediating channels to evolve dynamically, the proposed framework improves upon the traditional two-step approach, which treats mediation effects as contemporaneous and static. Using monthly data, we decompose the trade war's impact into direct and indirect components across major regional trade channels linking China and the US. The empirical results reveal pronounced asymmetries in adjustment patterns between the two economies. For China, trade balance responses are highly region specific, with indirect and lagged effects playing an important role in shaping long-run outcomes, reflecting gradual supply-chain reconfiguration and delayed trade adjustment. For the US, the effects are dominated by strong direct impacts, while indirect effects through third regions remain relatively limited. Overall, the inclusion of lagged mediators captures the temporal propagation of trade shocks that standard mediation models overlook, providing a more accurate and economically meaningful account of how the trade war reshaped global trade dynamics.