ERIA-DP-2023-11

ERIA Discussion Paper Series

No. 483

The Effects of the United States–China Trade War During the

COVID-19 Pandemic on Global Supply Chains:
Evidence from Viet Nam

Duc Anh DANG§

Central Institute for Economic Management, Viet Nam

Ngoc Anh TRAN

Indiana University Bloomington

August 2023
Abstract: The trade war between the United States (US) and China has affected their
bilateral trade as well as that with other countries. This study investigates how Vietnamese
firms performed during the COVID-19 pandemic under the shadow of this trade war. The
change in the log of Vietnamese exports to the US from 2017 to 2020 is used to measure
the impact of the trade war, and the change in the log of Chinese exports to the US is then
used as an instrument for the Vietnamese export change during the same period. It is found
that firms that faced more trade war exposure increased their investment, profit, and value
added, which may be due to the market exit of unproductive firms. Moreover, the trade
war impact is more pronounced for large firms. Foreign-invested firms gained less from
trade war exposure. The pandemic weakened the trade war effect on firm performances;
however, it exacerbated the trade tension effect on foreign-trade firms.
Keywords: Trade diversion; Trade war; Pandemic
JEL: F14, F16, R23


Corresponding author. Email: [email protected]
§
This research paper was conducted as part of the Economic Research Institute for ASEAN and East Asia
(ERIA)–Monash University project, Global Trade and Economic Recovery in the Post-Pandemic World.
The authors are deeply indebted to the members of this project for their invaluable suggestions. The opinions
expressed are the sole responsibility of the authors and do not reflect the views of their affiliations.
1. Introduction
The United States (US) and China have been engaged in a trade war that involves
imposing tariffs on specific products imported from each other, affecting the trade patterns
between them significantly. Moreover, the trade conflict has had spill-over effects on other
countries through global value chains and trade diversion. Amongst countries that have
benefitted from trade diversion due to this trade war, Viet Nam may emerge as the largest
beneficiary (Lee, 2019).
The impact of the US–China trade war on Viet Nam is remarkable for several reasons.
First, when China's exports to the US fell between 2018 and 2019 due to the trade tension,
many countries saw their exports to the US surge, as US importers had to look for alternative
sources that were not subject to the tariffs. Viet Nam emerged as the best option, because it
also produces goods that China typically exports to the US (and thus face tariffs). As
Vietnamese exports could replace these Chinese exports, computers, electronics, furniture,
footwear, textiles, and garments saw significant increases in exports to the US.
Figure 1 shows that Viet Nam's exports to the US were growing steadily even before
the US–China trade war, but the growth rate had slowed down – before suddenly increasing
in 2018. Since 2019, the trend indicates that the rising trade flows between the US and Viet
Nam has been likely influenced by the US–China trade war.

Figure 1: United States Imports of Goods from Viet Nam

($ billion and %)
90 40
80 35
70 30
60
25
50
%

20
40
15
30
20 10
10 5
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Growth rate (%) Export value (bil.)
Source: Authors’ calculations from UN, UN Comtrade Database, https://comtradeplus.un.org/ (accessed
30/10/2022).

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 As a result, Vietnamese exports have been taking the market share from Chinese
products that face tariffs when exported to the US (Figure 3.2). Furthermore, Viet Nam is
similar to China in terms of comparative advantage in labour-intensive industries, political
stability, and economic growth. As the US–China trade war intensifies, many reports and
analyses suggest that Chinese companies are diversifying or moving production operations
out of China and into Viet Nam (e.g. Reed and Romei, 2019), which can lead to increased
supply capacity for Viet Nam's exports to the US.

Figure 3.2: Share of United States Imports from China and Viet Nam
(%)

23 4

22 3.5

3
21
2.5
20
%

%
2
19
1.5
18
1
17 0.5

16 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
US import share from China (%) US import share from Vietnam (%)

US = United States.
Source: Authors’ calculations from UN, UN Comtrade Database, https://comtradeplus.un.org/ (accessed
30/10/2022).

Some studies have been conducted to investigate the effects of the trade war on the
economies of the US and China. According to Amiti, Redding, and Weinstein (2019), the
changes in US trade policy towards China have resulted in higher domestic prices for US
consumers and a reduction in overall US welfare. Balistreri, Böhringer, and Rutherford
(2018), as well as Li, He, and Lin (2018) and Bellora and Fontagne (2019), reached similar
conclusions. Cui and Li (2021) demonstrated that an increase in US import tariffs has resulted
in a decrease in Chinese firm entry. He, Mau, and Xu (2021) showed that Chinese firms that
are more vulnerable to US tariffs post fewer job openings and pay lower wages. This

3
reallocation is more prevalent amongst private firms, exporting firms, and non-foreign-
invested firms (Ding et al., 2022).
Other studies have looked at the impact of the trade diversion on other countries (e.g.
Bolt, Mavromatis, and van Wijnbergen, 2019). Nidhiprabha (2019) demonstrated that the
trade war has reduced Thai exports. Prior research had already demonstrated the impact of
trade policy shocks on firm employment (David, Dorn, Hanson, 2013; Pierce and Schott,
2016), technological innovation (Bloom, Draca, Van Reenen, 2016), and foreign market entry
(Crowley, Meng, Song, 2018). However, the idea that bilateral trade disputes affect firm
performances in third countries is rare. Only recently, Sun et al. (2020) investigated the impact
of the US–China trade war on Japanese multinational corporations and discovered that their
Chinese affiliates, who are more exposed to trade with North America, are experiencing lower
sales. However, how the effects of the trade war evolved during the COVID-19 pandemic
remains largely unexplored.
This study examines the firm-level impacts of the US–China trade war on Vietnamese
firm performance, spanning 2017 to 2020. The change in the log of exports from Viet Nam
to the US between 2017 and 2020 is used to measure the impact of the trade war when the US
first imposed tariffs on many exports by China. Whether the impact of the trade war on firm
performances was intensified during the COVID-19 pandemic is also explored by examining
the effects of the trade war on the level of stringency of exporting countries to the US. To
address potential endogenous problems, the change in the log of exports from China to the
US is used as an instrument for the change in Vietnamese exports to the US in the same period.
The potential mechanisms through which the trade war affects local firms are also considered.
This study makes several contributions to the literature. First, it adds to the growing
body on US–China trade tensions (e.g. Huang et al., 2018; Amiti, Redding, Weinstein, 2019;
Fajgelbaum et al., 2020). Additional evidence is provided of how the trade war affects
countries other than the US and China. Second, it contributes to studies on the growth and
performance of manufacturing firms in response to trade shocks. This is one of the first
attempts to investigate the indirect effects of the US–China trade war on developing countries
at the firm level. Third, previously unexplored interactions between the trade war and the
COVID-19 pandemic on firm performance is explored.
The rest of the paper is organised as follows. In the next section, background
information is provided on the evolution of the US–China trade war and the COVID-19
pandemic. In Section 3, a conceptual framework for the study is provided. Section 4 describes

4
the data and presents the empirical modelling strategy. Section 5 presents the results and
discusses the tests of potential mechanisms. Section 6 concludes.

2. The US–China Trade War and COVID-19 Pandemic

The US has claimed that China has been engaging in unfair trade practices and stealing
intellectual property for a long time and that the Government of China requires US companies
to transfer their technology to China. To force China to change its behaviours, then-US
President Donald Trump started to impose tariffs and other trade barriers on Chinese goods.
Trump asked the United States Trade Representative (USTR) to investigate imposing tariffs
on $50 billion worth of Chinese imports. China's Ministry of Commerce responded to this
action on 2 April 2018 by imposing tariffs on 128 US products, including a 25% tax rate on
aluminium scrap, aircraft, automobiles, pork products, and beans and soybeans as well as 15%
on fruit, nuts, and steel pipes. On 3 April, the USTR released a list of more than 1,300 Chinese
imports – worth $50 billion – that would be subject to tariffs, including satellites, batteries,
flat-screen televisions, medical equipment, and weapons. China retaliated by increasing tariffs
on cars, planes, and soybeans – the top agricultural exports from the US to China – by 25%.
On 5 April, Trump instructed the USTR to consider imposing tariffs on an additional $100
billion of goods in response to China's actions.
The US–China trade dispute escalated when China withdrew an order for US soybeans.
In May 2019, the US officially applied a 25% tariff on Chinese goods worth $200 billion
according to List 3. China announced that it would soon retaliate. In September 2019, the US
formally imposed additional tariffs on Chinese imports worth $125 billion (i.e. List 4A),
including flat-screen televisions, shoes, food, and watches. China responded by increasing
tariffs on US goods according to List 1. By the end of 2019, the US had levied tariffs on
Chinese imports totalling about $350 billion, including those on List 4B, while China had
levied tariffs totalling about $100 billion on US imports (Fajgelbaum and Khandelwal, 2022).
Meanwhile, the World Health Organization declared COVID-19 a global pandemic in
March 2020 as it spread rapidly across the globe. By the end of 2020, more than 79 million
people had been infected, and more than 1.7 million had died from COVID-19 globally
(WHO, 2020). Many countries implemented various measures such as lockdowns, travel
bans, and social distancing to try to control the pandemic with limited success.
Viet Nam was one of the few countries that managed to contain the pandemic
effectively and to minimise its economic impact. It acted swiftly and decisively to implement

5
strict containment measures, such as active contact tracing, targeted testing, and isolation of
suspected COVID-19 cases. These measures resulted in very low recorded infection and
mortality rates per capita in 2020 (Dang, 2022). Viet Nam also supported its economy with
timely policy interventions that helped it achieve one of the highest growth rates in the world
in 2020, driven by a strong export performance (Dabla-Norris and Zhang, 2021).

3. Conceptual Framework
3.1. Hypothesis 1: Trade War Increases Business Growth
According to this hypothesis, the trade diversion due to the US–China trade war results
in greater increases in output and employment in industries with higher exports compared to
industries with smaller increases in trade volume. Furthermore, the effects of export
expansion differs between firms within an industry. If firms' underlying profitability differs
due to differences in marginal costs of production and faces a fixed cost of exporting, higher
export demand disproportionately raises the profitability of firms with lower marginal costs
of production (Melitz, 2003; Demidova and Rodriguez-Clare, 2013). Firm-specific marginal
cost differences result from differences in manager entrepreneurial ability (Lucas, 1978;
Gollin, 2008) or underlying productivity (Melitz, 2003).
Against this setting, more productive firms benefit from policy-induced decreases in
variable export costs, because only they earn high enough variable profits from increased
exports to cover the fixed cost of exporting. As a result, the expansion of exporting markets
increases product and labour demand – and profitability – amongst these more productive
firms, while increasing labour costs and decreasing the profitability of inefficient firms that
only serve the domestic market. This shifts the market share and employment composition
away from less productive employers and towards more productive firms (McCaig and
Pavcnik, 2018a).
The trade war also forces foreign firms to relocate their supply chain activities away
from China, particularly at the final product assembly and finishing stages; companies can
either diversify their sourcing strategies or exit China entirely. Most businesses may not be
able to afford to relocate their factories out of China or to replace their Chinese-sourcing
vendors. This is because supply chain infrastructure takes time to establish, and China is
central to the majority of the world's production, sourcing, and procurement needs. Rather,
they may reallocate a portion of the supply chain or open new plants in another country,
allowing firms trading with the US to manage their 'origin of supply' while maintaining their

6
relationships with other markets – but based out of China. In this way, the employment of
existing foreign firms may be increased.

3.2. Hypothesis 2: Trade War Affects Firm Exit and Entry into the Market
Here, the trade war harms third-country industries supplying intermediate goods or
those that are part of the global value chain. Meanwhile, if growth in the US and China slows,
demand for their exports falls. Trade destruction has a significant impact on the economy,
which increases firm exit and harms firm entry and survival. However, the US–China trade
war also creates opportunities for firms in the third countries to substitute Chinese goods
targeted by tariffs in the US market or US products targeted by tariffs in the Chinese market,
thereby enabling the expansion of their export markets, increasing firm entry, and decreasing
firm exit. The magnitude of the benefit is determined by how quickly supply chains are
redirected to new suppliers and whether firms perceive the trade war as a permanent or
transitory phenomenon. It also depends on how substitutable the goods that China sells to the
US are in comparison to the exports of other countries (Benguria, 2022).

3.3. Hypothesis 3: The Pandemic Intensifies the Impact of the Trade War
The social distancing in many countries hurts their exports to the US, creating an
opportunity for Viet Nam – which was less affected by the pandemic in 2020 – to export more
to the US. In this regard, the COVID-19 pandemic prompts global supply chain restructuring,
including reallocation of production to reduce concentration risk and diversification of
production bases, which reinforces the impact of the trade war on business performance.

4. Empirical Methodology

4.1. Data Description

This study uses three main datasets: firm data from Vietnam Enterprise Surveys, Oxford
COVID-19 Government Response Tracker (OxCGRT) dataset, and trade data from the UN
Comtrade Database.

4.1.1. Vietnam Enterprise Survey Data

The primary dataset used is drawn from Vietnam Enterprise Surveys. These surveys
have been conducted annually since 2000 by the General Statistical Office and cover all
enterprises with more than 100 employees, a 50% representative sample of firms with 50–99
employees, 15%–20% with 10–49 employees, and 10% with less than 10 employees. The

7
firms are tracked over time via a unique firm identifier, allowing some to be followed over
time to observe whether they grow, enter, or exit. The surveys provide comprehensive
information about firms and their activities, including information on demographics,
ownership, business activities, employment, wages, assets, capital, business performance,
revenue, and profit. They also have information on whether firms buy or sell goods and
services from or to abroad. The years 2017 are taken as pre-trade war and 2020 as post-trade
war and when the pandemic happens.
Table 1 shows the descriptive statistics of the main variables. Nineteen percent of firms
have trading activities with foreign markets. Foreign-invested firms account for about 1%;
72% of firms report that they have an internet connection, and 8% have websites. The average
age of firm owners is 44 years, and 75% are male.

Table 1: Descriptive Statistics of Firms

Variables N Mean SD Min Max
Δ Trade war exposure 78,902 8.29 9.21 –6.85 31.81
Ln (Investment) 78,902 5.02 4.10 0 18.88
Ln (Employment) 78,902 2.46 1.56 0.41 11.01
Ln (Income) 78,902 7.73 3.41 0 20.14
Ln (Value Added) 78,902 7.73 3.45 –4.61 20.21
Whether firms have foreign trade(:=1) 78,902 0.19 0.39 0 1
Whether firms are foreign-invested(:=1) 78,902 0.01 0.08 0 1
Whether firms are small (:=1) 78,902 0.29 0.46 0 1
Whether firms have internet (:=1) 78,902 0.72 0.45 0 1
Whether firms have a website (:=1) 78,902 0.08 0.28 0 1
Age of firm owner 78,902 44.39 10.19 16 94
Sex of firm owner (Male:=1) 78,902 0.75 0.43 0 1
Education of firm owner 78,902 5.51 1.93 1 9
Note: Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from
Viet Nam from 2017 to 2020. Small firms have less than 100 employees.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

8
4.1.2. COVID-19 Stringency Index
The stringency index, which measures government response to the pandemic, is
collected from the OxCGRT dataset. It is argued that US imports were affected not only by
its COVID-19 situation but also by how the rest of the world handled the pandemic. Therefore,
the COVID-19 variables of US trading partners are considered. Specifically, the stringency
index is the level of stringency of the rest of the world in 2020, weighted by country 𝑗’s import
share of product 𝑘 in 2017 from all countries to the US except Viet Nam. The index formula
is:
𝑁
𝐼𝑀𝑘𝑗2017
𝑆𝐼𝑘𝑗 = ∑ × 𝑆𝐼𝑗2020
𝐼𝑀𝑘2017
𝑗=1

4.1.3. UN Comtrade Data

Data on Vietnamese exports to the US are taken from the UN Comtrade Database using
Harmonized System (HS) codes. This is an international database of five-digit product-level
information on all bilateral imports and exports between any given pair of countries. HS-
coded commodities that Viet Nam exports to the US are matched with corresponding industry
codes by Vietnamese manufacturing firms.
𝑈𝑆
∆𝑇𝑊𝑘𝑗 is constructed as the change in the log of exports of product 𝑘 in sector 𝑗 from
Viet Nam to the US between 2017 and 2020 – which may be driven by the trade tension – to
𝑐𝑜𝑣𝑖𝑑
measure the impact of the trade war exposure.1 ∆𝑇𝑊𝑘𝑗 measures the joint impact of the
trade war and pandemic in 2020.

𝑐𝑜𝑣𝑖𝑑 𝑈𝑆
∆𝑇𝑊𝑘𝑗 = ∆𝑇𝑊𝑘𝑗 × 𝑆𝐼𝑘𝑗

4.2. Empirical Approach

First, the firm outcomes relating to the trade war and pandemic use the following
equations:

𝑈𝑆
𝑦𝑖𝑗 = µ + 𝛾∆𝑇𝑊𝑘𝑗 + 𝜂𝑋𝑖𝑗 + 𝜀𝑖𝑗 (1)

1 One possibility that the higher Vietnamse exports are due to higher US consumption demand. In fact,
according to surveys conducted by the US Bureau of Labor Statistics (BLS), consumer expenditures were
substantially affected by the COVID-19 pandemic, which began in March 2020. Average annual expenditures
for all consumer units decreased by 2.7% in 2020 compared to 2019. The largest decrease in spending was
observed for apparel and services (–23.8%), followed by personal care products and services (–17.8%), alcoholic
beverages (–17.4%), and education (–11.9%) (BLS, 2021).

9
 𝑈𝑆 𝑐𝑜𝑣𝑖𝑑
𝑦𝑖𝑗 = 𝛼 + 𝛽∆𝑇𝑊𝑘𝑗 + 𝛾𝑆𝐼𝑘𝑗 + 𝛿∆𝑇𝑊𝑘𝑗 + 𝜃𝑋𝑖𝑗 + 𝜀𝑖𝑗 (2)

where 𝑦𝑖𝑗 is the outcome variable (e.g. log of employment, log of investment, log of income,
𝑈𝑆
and log of value-added of firm 𝑖 in sector 𝑗 in 2020), ∆𝑇𝑊𝑘𝑗 is the trade war exposure
measured by the change in the log of exports of product 𝑘 in sector 𝑗 from 2017 to 2020 from
𝑐𝑜𝑣𝑖𝑑
Viet Nam to the US, and ∆𝑇𝑊𝑘𝑗 measures the interaction impact of the trade war exposure
and pandemic in 2020. 𝑋𝑖𝑗 are firm characteristics. Standard errors are clustered by sector
level.
This analysis is performed for all firms as well as separately for foreign-invested firms
and firms with foreign trading. The potential role of foreign-invested firms in the expansion
of employment in the enterprise sector is particularly interesting. The results of this analysis
will show whether growth in the number of firms and employment in response to market
expansion is specific to a particular type of firm.

4.3. Instrumental Variable Method

The goal is to identify 𝛾 and 𝛿 in equations (1) and (2). If the change in the log of exports
is exogenous, the ordinary least squares (OLS) estimate of 𝛾 and 𝛿 indicates the impact of
exports to the US and the interaction with the pandemic on outcomes. The positive value of
𝛾 and 𝛿 implies that the trade war and pandemic promote firm performance; otherwise, they
do not have a beneficial effect. However, certain unobserved firm attributes can be correlated
with firms’ interested outcomes as well as the main interested variable. These factors can
make the OLS estimation of 𝛾 and 𝛿 biased and inconsistent.
To mitigate the endogeneity bias, an instrumental variable (IV) approach is adopted.
The change in Chinese exports to the US is taken as an IV. The first-stage specification is:
𝑈𝑆 𝑈𝑆
∆𝑇𝑊𝑘𝑗 = 𝛼 + Ꝩ∆𝐶𝐻𝐼𝑘𝑗 + 𝜃𝑋𝑖𝑗 + 𝜀𝑖𝑗 (3)

𝑐𝑜𝑣𝑖𝑑 𝑐𝑜𝑣𝑖𝑑
∆𝑇𝑊𝑘𝑗 = 𝜇 + 𝜋∆𝐶𝐻𝐼𝑘𝑗 + 𝜗𝑋𝑖𝑗 + 𝜖𝑖𝑗 (4)

𝑈𝑆
where the variable ∆𝐶𝐻𝐼𝑘𝑗 is the change in exports of product 𝑘 in sector 𝑗 from China to the
𝑐𝑜𝑣𝑖𝑑 𝑈𝑆
US between 2017 and 2020. ∆𝐶𝐻𝐼𝑘𝑗 is the multiple of ∆𝐶𝐻𝐼𝑘𝑗 and 𝑆𝐼𝑘𝑗 , and 𝑋𝑖𝑗 are firm
characteristics.

10
 This measure may satisfy the conditions of a valid IV. It is expected to be highly
correlated with the level of Chinese exports to the US. It is less likely to have a direct impact
on Vietnamese firm performance.

4.4. Potential Mechanism

4.4.1. Business Exit
The US–China trade war may create opportunities for firms in third countries to
substitute Chinese goods targeted by tariffs in the US market or US products targeted by
tariffs in the Chinese market, thereby expanding their export markets, increasing firm entry
and reducing firm exit. To test this hypothesis, 2017 business data are used for panel
businesses, and an indicator variable is constructed for a business that exits. This indicator is
then regressed on the change in trade war exposure according to the following equation:
𝑈𝑆
𝑦𝑖𝑗 = 𝛼 + 𝛽∆𝑇𝑊𝑘𝑗 + 𝜃𝑋𝑖𝑗 + 𝜀𝑖𝑗 (5)

where 𝑦𝑖𝑗 is the outcome variable (which is an indicator variable for firm 𝑖 in sector 𝑗 exiting
𝑈𝑆
between 2017 and 2020), and ∆𝑇𝑊𝑘𝑗 is the change in the log of exports of product 𝑘 in sector
𝑗 from Viet Nam to the US between 2017 and 2020.

4.4.2. Business Entry

To empirically examine the hypothesis that business entry is influenced by the trade
war, equation (5) is employed using a sample of businesses operating in 2020. The dependent
variable is an indicator variable for whether the business entered between 2017 and 2020.
This analysis will reveal whether greater trade tension and the pandemic are associated with
the expansion of industry employment and whether this may, in part, have occurred through
the net entry of firms.

5. Empirical Results
The OLS results are presented as a benchmark. In Table 2, an OLS regression is
presented with the different firm outcomes as the dependent variables. The main independent
variable is a change in the log of US imports of goods from Viet Nam from 2017 to 2020 as
a proxy for change in trade war exposure. Standard errors are clustered at the sector level. The
regression begins by relating the change in trade war exposure and firm performance
outcomes without other control variables. In the upper panel, it is found that the higher the

11
firm exposure is to the trade war, the better the firm performance – with higher employment,
investment, and income.

Table 2: Trade War Exposure and Firm Performance

(ordinary least squares estimates)
(1) (2) (3) (4)
VARIABLES Ln(Employment) Ln (Investment) Ln Ln (Value Added)
(Income)
Δ Trade war exposure 0.021** 0.039*** 0.044*** 0.044***
(0.009) (0.015) (0.010) (0.010)
Other variables No No No No
Δ Trade war exposure 0.015* 0.024** 0.030*** 0.030***
(0.008) (0.011) (0.007) (0.007)
Other variables Yes Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
R-squared 0.290 0.240 0.213 0.212
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
3. Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from Viet
Nam from 2017 to 2020.
4. Other variables include age, sex, and education level of firm owner; an indicator of whether firms have
internet; an indicator of whether firms have websites; and dummies for firm ownership.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

To check the robustness of the results, some exogenous firm characteristics are
controlled for, such as age, sex, and education level of firm owner; an indicator of whether
firms have internet; an indicator of whether firms have websites; and dummies for firm
ownership. The estimates in the lower panel are almost similar.
The results in column (1) in the lower panel show that a higher change in trade war
exposure is associated with a higher level of employment. Similarly, it increases the
investment, profit, and value-added of firms as shown in columns (2)–(4). The magnitude of
the coefficient in column (1) demonstrates that an additional 1% of change in exports
increases the number of employees by 0.015%. At the same time, it increases firm investment
and income by 0.024% and 0.030%, respectively.
The possible endogeneity bias that may arise from omitted time variables and
measurement errors leads to IV estimation, which takes into account unobserved factors that
may simultaneously correlate with trade war exposure and firm performance. Equation (1) is

12
estimated using an IV, which is the change in Chinese exports to the US from 2017 to 2020
(Table 3).

Table 3: Trade War Exposure and Firm Performance

(instrumental variable estimates)
(1) (2) (3) (4)
Ln (Employment) Ln Ln Ln
VARIABLES (Investment) (Income) (Value Added)
Δ Trade war exposure 0.026* 0.037* 0.043*** 0.043***
(0.015) (0.019) (0.013) (0.013)
First-stage estimation Dependent variable: Δ Trade war exposure
Δ China’s trade war exposure –2.32*** –2.32*** –2.32*** –2.32***
(0.62) (0.62) (0.62) (0.62)
Other variables Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
R-squared 0.286 0.239 0.211 0.211
Kleibergen-Paap Wald F statistic: 13.81
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Δ Trade war exposure is calculated by taking the change in log of United States (US) imports of goods from
Viet Nam from 2017 to 2020.
3. Δ China’s trade war exposure is the change in Chinese exports to the US from 2017 to 2020.
4. Other variables include age, sex, and education of firm owner; an indicator of whether firms have internet;
an indicator of whether firms have websites; and dummies for firm ownership.
5. In the first stage of the regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade war
exposure; and (ii) Stock-Yogo weak ID test critical values are 8.96 (15% maximal instrumental variable
size).
6. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

As seen in the lower panel, the first-stage coefficient is negative and statistically
significant. It shows that a lower value of China’s exports to the US resulted in less
competitive pressure on Vietnamese exports, so Vietnam could export more to the US. The
Kleibergen-Paap Wald F statistic in all specifications is 13.80 – well above the Stock-Yogo
weak ID test critical values of 8.96.
Consistent with the results presented above, the findings – shown in the upper panel of
Table 3 – confirm the effect of the change of trade war exposure on firm performance. The
estimated effect in column (1) is statistically significant and indicates that 1% of change in
exports increases the number of employees by 0.026%, which is larger than the OLS estimate.
In addition, it increases firm investment and income by 0.037% and 0.043%, respectively, as
indicated in columns (2)–(3). The larger trade war exposure coefficients indicate that not
controlling for unobservables and measurement errors underestimates the true size of the
effect of trade war exposure on firm performance.

13
5.1. Heterogeneity
Foreign-trade firms that are directly linked to the global value chain may be exposed
more to the trade war. The impact of trade exposure on foreign-trade firms is investigated in
Table 3. The results in columns (1)–(2) indicate that there was no difference in the effects of
trade war exposure on foreign-trade firms compared to other firms. Even the results in
columns (3)–(4) show that foreign-trade firms benefited less, such as through lower income
and value added, than others.
These results seem counterintuitive; it is expected that the trade diversion would result
in greater increases in output and employment in industries with higher exports compared to
industries with lower exports. One possible explanation is that foreign-trade firms may face
lower demand from other markets due to a decline in international trade, although they may
benefit from less competition pressure from Chinese exports. The IV results in the lower
panels confirm the OLS results, showing that foreign-trade firms have not benefited more
than others.

Table 4: Trade War Exposure and Foreign-Trade Firm Performance

(1) (2) (3) (4)
VARIABLES Ln(Employment) Ln Ln Ln (Value
(Investment) (Income) Added)
OLS estimate
Δ Trade war exposure × whether –0.008 –0.001 –0.024*** –0.022***
firms have foreign trade
(0.008) (0.013) (0.007) (0.007)
IV estimate
Δ Trade war exposure × whether –0.003 –0.008 –0.023** –0.021*
firms have foreign trade
(0.014) (0.020) (0.011) (0.011)
Other variables Yes Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
Kleibergen-Paap Wald F statistic: 6.56
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Other variables include Δ Trade war exposure; an indicator of whether firms engage in foreign trade; age,
sex, and education level of firm owner; an indicator of whether firms have internet; an indicator of whether
firms have websites; and dummies for firm ownership.
3. Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from Viet
Nam from 2017 to 2020.
4. In the first stage of the regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade war
exposure; and (ii) Stock-Yogo weak ID test critical values are 4.58 (15% maximal instrumental variable
size).
5. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

14
 Firms may have different capacities in capturing the benefits from trade war exposure,
depending on their size. Larger firms are more likely to be involved in global value chains
than smaller ones, and they may better capture the benefits resulting from the trade war. To
test this possibility, trade war exposure interacts with a dummy for small firms. The
regressions exploring the relationship between trade war exposure with firm size and firm
performance have the same specifications as previous regressions (Table 5).

Table 5: Trade War Exposure and Firm Performance by Firm Size

(1) (2) (3) (4)
VARIABLES Ln(Employment) Ln Ln Ln
(Investment) (Income) (Value Added)
OLS estimate
Δ Trade war exposure × –0.019** –0.043*** –0.039*** –0.039***
whether firms are small
(0.008) (0.015) (0.012) (0.012)
IV estimate
Δ Trade war exposure × –0.023** –0.061** –0.042** –0.042**
whether firms are small
(0.011) (0.025) (0.016) (0.017)
Other variables Yes Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
Kleibergen-Paap Wald F statistic: 6.83
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Other variables include Δ Trade war exposure; an indicator of whether firms are small; age, sex, and
education level of firm owner; an indicator of whether firms have internet; an indicator of whether firms
have websites; and dummies for firm ownership.
3. Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from Viet
Nam from 2017 to 2020.
4. Small firms have less than 100 employees.
5. In the first stage of the IV regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade
war exposure (Δ China’s trade war exposure × whether firms have foreign trade is used as an instrument for
Δ Trade war exposure × whether firms have foreign trade); and Stock-Yogo weak ID test critical value is
4.58 (15% maximal IV size).
6. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

The results in Table 5 confirm that the impacts of the trade war differed according to
firm size. They indicate that the impacts of the trade war on firm performance were more
profound on large firms, supporting the hypothesis that large firms benefitted more than
smaller ones. In the lower panel of Table 3.5, the impacts of the trade war are estimated
separately for different firm sizes using IV estimation. Columns (1) – (4) confirm that the

15
effects of the trade war were more pronounced for large firms, with larger magnitudes of
coefficients.
This analysis is performed separately for foreign-invested firms, as their potential role
in the expansion of employment in the enterprise sector is interesting (Table 6). The findings
in columns (1) and (2) show that there was no difference between foreign-invested and
domestic firms in facing an increased level of trade war exposure. However, foreign-invested
firms tended to have lower incomes and value added than domestic firms facing a higher level
of trade war exposure as presented in columns (3) and (4).
The lower panel shows the IV estimates for foreign-invested firms. Consistent with the
OLS findings, the results in columns (1) to (4) reveal that foreign-invested firms benefited
less from the trade war. These results may be due to exports to the US (e.g. garments, textiles,
furniture, and dried fish) being largely provided by domestic firms, which were previously
processed in China before Trump’s tariff hikes.

Table 6: Trade War Exposure and Firm Performance by Firm Ownership

(1) (2) (3) (4)
VARIABLES Ln(Employment) Ln Ln Ln (Value
(Investment) (Income) Added)
OLS estimate
Δ Trade war exposure × whether –0.011 –0.025 –0.039*** –0.043***
firms are foreign-invested
(0.008) (0.017) (0.013) (0.014)
IV estimate
Δ Trade war exposure × whether –0.032* –0.065*** –0.077*** –0.086***
firms are foreign-invested
(0.018) (0.023) (0.027) (0.027)
Other variables Yes Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
Kleibergen-Paap Wald F statistic: 6.90
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Other variables include Δ Trade war exposure; an indicator of whether firms are foreign-invested; age, sex,
and education level of firm owner; an indicator of whether firms have internet; an indicator of whether firms
have websites; and dummies for firm ownership.
3. Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from Viet
Nam from 2017 to 2020.
4. In the first stage of the IV regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade
war exposure (Δ China’s trade war exposure × whether firms have foreign trade is used as an instrument for
Δ Trade war exposure × whether firms have foreign trade); and (ii) Stock-Yogo weak ID test critical value
is 4.58 (15% maximal IV size).
5. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

16
5.2. Trade War Impacts in the COVID-19 Context
Whether COVID-19 strengthened the impact of the trade war on firm performances is
explored by estimating equation (2). The OLS results are shown in the upper panel of Table
7. The results in columns (1) to (4) indicate that the pandemic did not significantly affect firm
performance. It also did not change the effects of trade war exposure on firm performance.
The lower panel examines the impacts of trade war exposure and the pandemic using
IV estimation. The results show that the pandemic resulted in a lessened effect of the trade
war on firm performance such as investment, income, or value added. However, the
magnitude of the coefficients is small.

Table 7: Trade War Exposure During the Pandemic and Firm Performance
(1) (2) (3) (4)
VARIABLES Ln(Employment) Ln Ln (Income) Ln (Value
(Investment) Added)
OLS estimate
Δ Trade war exposure × 0.0000 –0.0003 –0.0002 –0.0003*
stringency
(0.0001) (0.0002) (0.0001) (0.0002)
IV estimate
Δ Trade war exposure × 0.0000 –0.0006* –0.0004** –0.0005**
stringency
(0.0001) (0.0003) (0.0002) (0.0002)
Other variables Yes Yes Yes Yes
Observations 78,902 78,902 78,902 78,902
Kleibergen-Paap Wald F statistic: 5.75
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Other variables include Δ Trade war exposure; a stringency measure; age, sex, and education level of firm
owner; an indicator of whether firms have internet; an indicator of whether firms have websites; and dummies
for firm ownership.
3. Δ Trade war exposure is calculated by taking a change in log of United States (US) imports of goods from
Viet Nam from 2017 to 2020.
4. The stringency measure is the average stringency of the rest of the world in 2020, weighted by country 𝑗’s
import share of product 𝑘 in 2017 from all countries to the US except Viet Nam.
5. In the first stage of the IV regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade
war exposure (Δ China’s trade war exposure × stringency invested is used as an instrument for Δ Trade war
exposure × stringency); and (ii) Stock-Yogo weak ID test critical value is 4.58 (15% maximal IV size).
6. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

Table 8 presents the results of the analysis of the impacts of the trade war on foreign-
trade firm performance during the pandemic. The coefficients of the main variable in columns
(1) to (4) are statistically significant and indicate that a higher level of stringency led to a

17
greater effect on firm performance. This confirms the conjecture that stringency in exporting
countries negatively impacts their exports to the US, thereby creating favourable conditions
for Vietnamese exports to the US. However, the magnitudes of coefficients in columns (1)
and (4) are small. The IV estimation shows similar results, although some of the main
coefficients are not statistically significant.

Table 8: Trade War Exposure During the Pandemic and Foreign-Trade Firm
Performance
(1) (2) (3) (4)
Ln Ln Ln (Value
VARIABLES Ln(Employment)
(Investment) (Income) Added)
OLS estimate
Δ Trade war exposure × 0.0006*** 0.0004** 0.0003*** 0.0003***
stringency
(0.0001) (0.0002) (0.0001) (0.0001)
IV estimate
Δ Trade war exposure × 0.0007*** 0.0002 0.0002* 0.0002
stringency
(0.0003) (0.0003) (0.0001) (0.0001)
Other variables Yes Yes Yes Yes
Observations 14,732 14,732 14,732 14,732
Kleibergen-Paap Wald F statistic: 7.12
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. Other variables include Δ Trade war exposure; a stringency measure; age, sex, and education level of firm
owner; an indicator of whether firms have internet; an indicator of whether firms have websites; and dummies
for firm ownership.
3. Δ Trade war exposure is calculated by taking the change in log of United States (US) imports of goods from
Viet Nam from 2017 to 2020.
4. The stringency measure is the average stringency of the rest of the world in 2020, weighted by country 𝑗’s
import share of product 𝑘 in 2017 from all countries to the US except Vietnam.
5. In the first stage of the IV regression, (i) Δ China’s trade war exposure is used as an instrument for Δ Trade
war exposure (Δ China’s trade war exposure × stringency invested is used as an instrument for Δ Trade war
exposure × stringency); and (ii) Stock-Yogo weak ID test critical value is 4.58 (15% maximal IV size).
6. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

5.3. Testing for Potential Mechanisms

One of the possible channels – based on Melitz’s model that the US–China trade war
may affect firm performance in third countries – is that the trade war induces more productive
firms to enter the market, while some less productive firms continue to produce only for the
domestic market and simultaneously force the least productive firms to exit. This is tested for
by examining the effect of the trade war on firm entry and exit. To avoid the possibility that

18
the results are effects of sampling, only the sample that covers all Vietnamese firms with no
less than 100 employees is used.
The results in both OLS and IV estimations are reported in Table 9. In columns (1)
and (3), the estimated coefficients for the change in trade war exposure are positive and show
that the trade war may have stimulated firm entry. However, the coefficients are not
statistically significant. Similarly, as shown in columns (2) and (4), a change in trade war
exposure increased the probability of firms exiting markets. In addition, the coefficient in
column (4) is statistically significant, although its magnitude is small. This may be because
the sample does not cover small firms that are likely to be less productive than larger ones. In
addition, these estimates only reflect a short-term effect. The effects of trade war exposure
could be larger if the trade war is prolonged.

Table 9: Potential Channels

(1) (2) (3) (4)
OLS Estimates IV Estimates
VARIABLES Whether Firms Whether Firms Whether Firms Whether Firms
Enter 2020 Exit 2020 Enter 2020 Exit 2020
Δ Trade war 0.0005 0.0004 0.0008 0.0008*
exposure (0.0007) (0.0003) (0.0013) (0.0005)
Observations 27,510 41,719 27,510 41,719
R-squared 0.0002 0.0009 0.0000 –0.0003
IV = instrumental variable, OLS = ordinary least squares.
Notes:
1. Standard errors are robust to heteroskedasticity, and those clustered at the sector level are reported in
parentheses.
2. The sample only includes enterprises with 100 employees or more.
3. Δ Trade war exposure is calculated by taking the change in log of United States imports of goods from Viet
Nam from 2017 to 2020.
4. *** = significant at the 1% level, ** = significant at the 5% level, and * = significant at the 10% level.
Source: Authors’ calculations from GSO (2022) and UN, UN Comtrade Database, https://comtradeplus.un.org/
(accessed 30/10/2022).

6. Conclusion
The US–China trade war has created new export opportunities for firms in other
countries that induced labour and market share reallocation from less to more productive firms
within an industry, generating additional aggregate output gains. While empirical studies have
confirmed that trade reallocates employment towards more productive uses and increases
aggregate productivity through the reallocation of labour and market shares from less to more
productive firms in high-income countries, substantially less is known about this topic in
developing ones.

19
 To examine this issue, a higher tariff imposed by the US on many export products by
China was used as an exogenous shock to investigate their impacts on Vietnamese firms. The
change in the log of exports from Viet Nam to the US between 2017 and 2020 was used to
measure the impact of the trade war. Whether the impact of the trade war on firm
performances grew during the COVID-19 pandemic was examined through the effects of the
interaction of the trade war with the level of stringency of exporting countries to the US. To
address potential endogenous problems, the change in the log of exports from Viet Nam to
the US was used as an instrument for the change in Vietnamese exports to the US in the same
period. The potential mechanism through which the trade war may affect local firms was also
tested.
It is found that a higher trade war exposure increased the investment, profit, and value
added of firms. The effects of trade war were more pronounced for large firms. Foreign-
invested firms benefited less from the trade war. The trade war impacted the local market by
increasing the probability of firms exiting markets. The pandemic resulted in a lower effect
of the trade war on firm performance; however, it strengthened the effect on foreign-trade
firms – although it is small.
This paper expects to complement other studies showing that the reduction in the share
of Chinese exports to the US may impact the growth of businesses in developing countries.
In addition, these effects could be magnified by the pandemic. The impacts of the trade war
and pandemic on the dynamics of enterprises and firm performance also provide insight into
understanding transitions and reallocation of resources across industries. The results imply
that governments should support domestic firms in expanding markets through export
promotion.

20
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SOKLONG, Vutha HING, Characteristics on Multinational Activities
and Ratha KONG
2023-07 Diep PHAN and Ian Capital Cost, Technology Choice, and July
(No. 479) COXHEAD Demand for Skills in Industries in Viet Nam 2023
2023-06 Shandre Mugan Structural Changes and the Impact of FDI on June
(No. 478) THANGAVELU Singapore’s Manufacturing Activites 2023
2023-05 Yanfei LI, Jia ZHAO, and Technological Innovation and the June
(No. 477) Jianjun YAN Development of the Fuel Cell Electric Vehicle 2023
Industry Based on Patent Value Analysis
2023-04 Etsuyo MICHIDA Effectiveness of Self-Regulating June
(No. 476) Sustainability Standards for the Palm Oil 2023
Industry
2023-03 Ian COXHEAD and Does the Skill Premium Influence Educational May
(No. 475) Nguyen Dinh Tuan VUONG Decisions? Evidence from Viet Nam 2023
2023-02 Ha Thi Thanh DOAN, Divergence in Non-Tariff Measures and the May
(No. 474) Kunhyui KIM and Mahdi Quality of Traded Products 2023
GHODSHI
2023-01 Dionisius A. NARJOKO Foreign Direct Investment, Agglomeration, May
(No. 473) and Production Networks in Indonesian 2023
Manufacturing
2022-43 Peter WARR and Productivity Effects of Viet Nam’s March
(No. 472) Huy Quynh NGUYEN Rice Land Restrictions 2023
2022-42 Yuki HIGUCHI, Do Management Interventions Last? March
(No. 471) Vu Hoang NAM, and Evidence from Vietnamese SMEs 2023
Tetsushi SONOBE
2022-41 Huong-Giang PHAM, Adoption of Sustainable Practices for March
(No. 470) Tuong-Anh T. NGUYEN, Improving Agricultural Productivity in Viet 2023
and Hoang-Nam VU Nam
2022-40 Quang Hoan TRUONG and Impacts of FDI Presence and Product March
(No. 469) Van Chung DONG Sophistication on the Demand for Skilled and 2023
Unskilled Labour: Evidence from SMEs in
Viet Nam
2022-39 Araba SEY Availability of Gender-Disaggregated Data on January
(No. 468) the ASEAN Digital Economy 2023
2022-38 Yose R. DAMURI and RCEP and Indonesia: Economic Reform and January
(No. 467) Deni FRIAWAN Prospects for Implementation 2023

ERIA discussion papers from previous years can be found at:

http://www.eria.org/publications/category/discussion-papers