Weaning away from China – Trade and Welfare Implications

Over the past couple of years import dependency on China has deepened and expanded globally. Incidences like supply chain disruption during COVID19 due to over dependence on single supply source, and countries’ heavy reliance on Chinese imports—often termed the “China shock”— has garnered anxiety worldwide and forced them to make efforts to wean away from China. The weaning attempt started in 2018 when the US imposed additional tariffs on its imports from China. Gradually, the process of decoupling or weaning away from China, was adopted by other economies. Despite the motivation to move away from China, data shows that nations continue to depend increasingly on imports from China. In this study we empirically quantify the trade dependence on China and estimate the costs associated with weaning away from China using structural gravity model of trade. We find that lowering dependence on Chinese imports results in diminishing countries’ propensity to export. Furthermore, general equilibrium counterfactual simulations show that if US progressively reduces import dependency on China, the welfare loss will be higher for the US as compared to that of China. The rest of the world will also suffer welfare losses owing to US’ action to bar Chinese imports.