## Trade Diversion Effects from Global Tensions—Higher Than We Think

_IMF Working Papers, November 10, 2023_

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## Bibliographic details
- Authors: Mengqi Wang, Swarnali A Hannan
- Published: November 10, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400257421.001

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### Research question and data
- Builds a unique industry-level dataset by combining Mexico’s nationally sourced input-output data (INEGI) with cross-country sources (WIOD, UN Comtrade).
- Uses the dataset to exploit higher supply linkages across a larger number of industries than available in cross-country sources.
- Focuses on estimating trade diversion effects on Mexico’s exports to the U.S. from two episodes: the U.S.-China trade tension in 2018 and the U.S. sanctions on Russia in 2014.

### Methodology
- Empirical approaches used: difference-in-differences, local projections, and a few other empirical methodologies.
- Compares results using nationally sourced input-output data versus those derived from cross-country sources.

### Key findings
- For the U.S.-China 2018 episode, the paper finds higher trade diversion effects than estimates in the literature.
- Output tariff plays an important role in driving trade diversion effects.
- Some evidence of a positive impact through downstream tariffs.
- Effects are stronger when nationally sourced input-output data (INEGI) is used compared to cross-country sources (WIOD, UN Comtrade).
- Magnitude of trade diversion across industries does not depend on Mexico’s industry-level trade exposure to the U.S.
- Magnitude instead depends on:
  - the U.S. tariff changes on Chinese goods,
  - the decrease in imports from China,
  - product substitutability with Chinese products,
  - and (weakly) on Mexico’s GVC integration.
- For the U.S. sanctions on Russia in 2014 episode, the paper also finds positive trade diversion effects.
- Overall conclusion: trade diversion effect might be higher than previously thought and proper accounting of dataset and supply linkages makes a difference.

### Subject areas and keywords
- Subject: Exports, Imports, International trade, Revenue administration, Tariffs, Taxes, Trade tensions, Valuation, origin and classification
- Keywords: aggregate trade diversion effect, change dummy, export share, Exports, Global, Imports, input-output datum, input-output linkages, magnitude of trade diversion, origin and classification, summary statistics of tariff exposure, Tariffs, trade diversion, trade diversion effect, Trade tensions, U.S.-China trade tensions, Valuation

*IMF Working Paper — Pages: 62; Volume: 2023; Issue: 234; Series: Working Paper No. 2023/234; DOI: https://doi.org/10.5089/9798400257421.001; Stock No: WPIEA2023234; ISBN: 9798400257421; ISSN: 1018-5941*

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_Source: https://www.imf.org/en/publications/wp/issues/2023/11/10/trade-diversion-effects-from-global-tensions-higher-than-we-think-539680_