Trade War Impact on GVCs and China’s Counter Measures

After joining the WTO in 2001, China has become the largest supplier of goods to Europe, Asia, Africa and South America, as well as the US. Dissatisfaction with high and long-term trade deficit stimulated the US to accept tariff restrictions in trade with China, which was called the “trade war”. The purpose of this paper is twofold: to identify the possible consequences of trade war for existing production linkages within the GVCs; to characterise the counter measures carried out both by Chinese companies and Chinese government. In this paper we consider only trade war direct effects on China. We highlight a set of implications of the trade war on China in terms of company performance. These effects include trade diversion (a short-term effect), switching suppliers (a medium-term effect), and production shift (a long-term effect). The combination of effects has led to a high probability of transformation along the GVCs. Chinese government responds in order to restore broken ties in the chain. One of the most important ways is to focus on the domestic market and move from an export-oriented economy to a consumer-oriented economy with technological and scientific leadership. China has set the task of combining the GVC model with the development of the internal value chain model. The reconstruction of the value chain will take place mostly between countries along the “One Belt – One Road”.