Trade Diversion, Supply-Chain Reconfiguration, and Rerouting During the U.S.–China Trade War

How did the 2018 U.S.–China trade war affect bystander economies embedded in global value chains? Using Thai customs data from 2013 to 2023, we document sizable trade diversion toward Thailand, a major third-country exporter with extensive trade links to both the United States and China. Thai exports to the U.S. expanded more in products facing larger U.S. tariff increases on Chinese goods. This response was delayed, emerging only after three to four years, and was concentrated in capital goods within selected manufacturing sectors. We show that trade diversion was strongly mediated by global value chains: the products that expanded the most were those with pre-existing supply-chain linkages to China. Firm-level evidence suggests that the U.S. tariffs also lead to both increased imports of Chinese-sourced inputs and the transshipment of Chinese goods through Thailand. Nevertheless, after netting out transshipment and imported input content, we find that trade diversion generated substantial domestic value-added and employment gains. In contrast, Chinese retaliatory tariffs had limited spillover effects. Our findings show that the spillover effects of the trade war operated through supply-chain linkages and delivered meaningful real gains to a bystander economy.