The possibility of a trade war with China is back. As President Trump continues to advocate for new tariffs, his policies evoke the uncertainty that used to characterize the United States’ trade relationship with China.

Before China’s accession to the World Trade Organization, the United States would often threaten to revoke their most favored nation status, especially following the Tiananmen Square protests. This uncertainty made China hesitant to invest in exporting goods that could, one day, face an average tariff of thirty-one percent.

When China joined the WTO in 2001, their most favored nation status became permanent. In a new paper in the American Economic Review, authors Kyle Handley and Nuno Limão show that, with this new certainty, China began to export more goods and lower their prices. This was especially true for goods that originally faced a high tariff threat.

Figure 2, Panel A from Handley and Limão (2017)

Figure 2, Panel A plots China’s export sectors by initial tariff threat and export growth. The x-axis is a measure of the tariff threat in 2000, and the y-axis is export growth from 2000 to 2005. Sectors with potentially high tariff threats, like textiles, saw dramatic increases in exports after China’s WTO accession. Sectors with low tariff threats, like vegetables, did not experience the same export boom. The size of each circle indicates the number of products in each sector.

The reduction in trade policy uncertainty did have a downside: it decreased U.S. manufacturing sales and employment by at least one percent. However, by lowering prices on imported goods, it ultimately had a net positive effect on consumer welfare.