This study analyzes the effects of the U.S.-China trade war on third-country exports to the U.S. and China, focusing on South Korea. Using tariff change data that occurred during the 2018~19 US-China trade war, it estimates product-level elasticities of substitution, i.e., tariff cross-elasticities, and investigates their determinants across countries, industries, and products. This analysis elucidates the heterogeneous effects of the trade war, informing policies to seize new export opportunities amid ongoing global trade fragmentation.

The results show that Korea’s tariff cross-elasticities toward the U.S., relative to U.S. tariffs on Chinese imports, were generally positive, implying that higher U.S. tariffs tend to boost Korean exports to the U.S. In contrast, the elasticity toward China, relative to Chinese tariffs on U.S. imports, was negative on average, suggesting that increased Chinese tariffs tend to reduce Korea’s exports to China. Comparing predicted and actual export changes reveals a potential underestimation bias in the regression model.

Decomposing the determinants of tariff cross-elasticities into country, industry, and product factors reveals the significance of country-specific elements for exports to the U.S. and China, with industry factors also exhibiting relevance for exports to the U.S. In the case of Korea, tariff elasticities were higher in high-tech, capital-intensive, or export-integrated industries.

Additionally, analysis of Korean manufacturing shows that industries with economies of scale reduced production costs and expanded output during the trade war. Zooming into factors for economies of scale, capital-intensive industries with prior investments saw increased value-added, expanded investment, and lower costs. Export-integrated industries exhibited similar positive outcomes.

Lastly, simulations based on the estimated elasticities project that four U.S.-China tariff scenarios increase Korea’s exports to the U.S. by 0.1% to 7.0%, depending on the extent of U.S. tariff changes on Chinese imports. In a severe scenario where both countries impose roughly 10%p additional tariffs on all bilateral imports, Korea's exports are projected to rise by about 4.7% to the U.S. and 9.1% to China.

These findings inform policy decisions for Korea to navigate global trade changes, such as the U.S.-China trade war, by prioritizing targeted support for high-tech and capital-intensive industries and bolstering investment and export infrastructure to enhance resilience and capture emerging export opportunities.

Abstract (ENG)
Preface
Summary (KOR)

Chapter 1. Introduction

Chapter 2. Concept and Estimation of Export Substitution Elasticity
　Section 1. Theoretical Framework
　Section 2. Estimating Export Substitution Elasticities

Chapter 3. Analysis of Factors Behind Export Substitution Elasticity
　Section 1. Decomposition by Components of Export Substitution Elasticity
　Section 2. Industry-Level Analysis of Export Substitution Elasticity

Chapter 4. Impact of the U.S.―China Trade War on Korean Industries
　Section 1. Measurement and Data
　Section 2. Analytical Model
　Section 3. Results
　Section 4. Summary

Chapter 5. U.S.―China Tariff Policy Scenarios and Resulting Changes in Korea’s Exports
　Section 1. U.S.―China Tariff Policy Scenarios
　Section 2. Projected Changes in Korea’s Exports

Chapter 6. Conclusion and Policy Implications

References
Appendix