The Impact of Trade Wars on Firms in Third Countries

Why It Matters

The findings show that trade wars generate both opportunities and losses for bystander economies, demanding policy tools that address distributional effects rather than just aggregate gains.

Key Takeaways

• Italian firms saw 2.5% average export revenue rise during US‑China war.
• Gains concentrated in productive, investment‑intensive, multi‑product exporters.
• External economies of scale explained ~75% of firm‑level variation.
• Standard trade models capture average but underestimate dispersion across firms.
• One‑in‑five Italian exporters experienced revenue declines despite overall gains.

Pulse Analysis

The 2018‑2019 tariff escalation between the United States and China is often portrayed as a bilateral clash, yet its ripple effects reach firms far beyond the two economies. By treating Italy as a bystander, the new CEPR paper isolates how tariff‑induced price shifts reroute demand, alter competitive dynamics, and trigger scale‑economy feedbacks. This approach moves past aggregate trade‑gravity estimates, offering a micro‑level lens that captures both substitution opportunities for Italian exporters and the heightened competition they face from displaced Chinese producers.

The authors estimate a heterogeneous trade model on firm‑level export data, finding a modest 2.5 % rise in Italian export revenues on average, but a standard deviation of 7.6 %, meaning one in five firms actually lost ground. Gains clustered among firms that were already more productive, capital‑intensive, and diversified across products, while external economies of scale accounted for roughly three‑quarters of the observed dispersion. By contrast, standard models that omit scale effects or cross‑price elasticities reproduce the mean gain but compress the variance to under 2 %.

These results have clear policy ramifications. Policymakers in bystander economies cannot rely on headline‑level trade‑gain figures when designing support programs, because the distributional fallout may be sizable. Incorporating external scale economies and demand‑substitution channels into trade‑impact assessments yields a more realistic picture of which sectors need assistance and which can capitalize on new market openings. The framework also offers a template for evaluating future trade shocks—whether stemming from geopolitical tensions, technology bans, or climate‑related restrictions—ensuring that trade policy remains responsive to both aggregate efficiency and firm‑level equity.