Demystifying Trade Patterns In A Fragmenting World

So-called “connector” countries have been argued to benefit from the US-China trade tensions, given their rising share in US imports. This paper draws an important distinction between trade reallocation—countries increase domestic production to substitute for declining Chinese exports to the US—and trade rerouting—countries serve as one-stop place for transshipment of Chinese exports to the US. Leveraging granular data on trade and FDI flows and global input-output linkages, focusing on six Asian countries, we first document that the connector role of these countries may reflect their growing domestic markets and Chinese supply chain reconfiguration, beyond trade rerouting from China to the US. We then zoom in on value-added components and deploy a synthetic control approach to disentangle trade reallocation from trade rerouting. While the evidence remains elusive for five of the six countries, Vietnam appears to have benefited from trade reallocation, with increased domestic content in its exports to the US in strategic sectors, instead of facilitating significant transshipment of Chinese exports to the US. Such domestic production expansion also helped increase domestic content in Vietnam’s exports to the rest of the world, and may be partly due to Chinese firms relocating to Vietnam through greenfield FDI. Despite potential short-term gains, trade reallocation increases connector countries’ vulnerability to geoeconomic fragmentation with losses to all countries in the long run.