The financial costs of the United States-China trade tensions: evidence from East Asian stock markets
- PDF / 800,461 Bytes
- 31 Pages / 439.37 x 666.142 pts Page_size
- 114 Downloads / 201 Views
The financial costs of the United States‑China trade tensions: evidence from East Asian stock markets Francesca de Nicola1 · Martin Kessler1 · Ha Nguyen1
© Kiel Institute 2020
Abstract This paper examines the impacts of United States-China trade tensions via the lens of East Asian stock markets. Studying 10 indices of the main East Asian stock markets, it finds that announcements of “trade war” escalation translated into 50 to 60 percent of the total declines in two major Chinese stock markets over the first eight months of 2018. In other words, in the absence of the “trade war” Asian stocks would have experienced half the decline, or they would have registered gains. Keywords Stock returns · Event study · Trade policy · China JEL Classification F1 · G1 · O2
1 Introduction How costly is protectionism? This question historically has attracted lots of attention (see for example earlier work by Krugman 1990; Feenstra 1992 and more recent analysis by Costinot and Rodríguez-Clare 2018). Yet, the focus of these studies tends to be more on the U.S. economy than on the rest of the world. We take a different (and complementary) approach and assess the impact of the ongoing United States-China “trade war” via the lens of East Asian financial markets. By “trade war”, as it has been portrayed by the media, we refer to the threats, announcements, and implementation of trade barriers raised by the United States and China. Those tensions, which started in 2017 after the current U.S. administration took over, and intensified in 2018, had a global impact given the size of those two economies and the intricacy of value chains in East Asia. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1029 0-020-00381-3) contains supplementary material, which is available to authorized users. * Francesca de Nicola [email protected] 1
World Bank, 1818 H Street NW, Washington, DC 20433, USA
13
Vol.:(0123456789)
F. de Nicola et al.
We study how stock markets in East Asia reacted to announcements of protectionist measures by comparing returns immediately after protectionist announcements and in the rest of the period. The period we consider starts with the inauguration of the Trump administration (January 20, 2017) and ends on August 20, 2018. To the extent that trade wars could affect the real economic activities of a company, a sector, or a country, the efficient market hypothesis implies that public information is immediately reflected in the valuation of assets. In this case, the asset is the aggregate stock index, which captures an important part of the economy. Our paper is related to an emerging literature that estimates the effects of trade tensions. Crowley et al. (2018), using Chinese customs data from 2000 to 2009, find that Chinese firms are less likely to enter new foreign markets and more likely to exit from established foreign markets when their products are subject to increased trade uncertainty. Huang et al. (2018) assess the stock market responses of both U.S.
Data Loading...
