Determinants of Policy Responses in the US–China Tit-for-Tat Trade War

We assess the economic and political factors that underpinned the scope and magnitude of tariffs and US subsidies during the US–China trade dispute. We develop a political-economy model of tariff retaliation and compensatory subsidization and econometrically quantify the determinants of trade and subsidy policies during the trade dispute. Our empirical findings confirm that political (electoral geography of targeted commodities) and economic (optimal tariff relationships, attributes of export supply and import demand, and trade balances) factors were key determinants of US policies. China’s tariff retaliation was consistent with higher protectionism for larger sectors with extensive state ownership.