How U.S. tariffs impact China’s domestic sourcing: Evidence from firm-to-firm transactions

Abstract

This paper investigates how tariff shocks influence the domestic performance of Chinese firms, leveraging quarterly data on both international and domestic transactions from 2017 to 2018. Our analysis uncovers several key findings: (i) a one percent increase in export tariffs leads to a 0.235 percent increase in sales to domestic buyers, suggesting that higher export costs drive suppliers to prioritize domestic markets, primarily affecting the extensive margin; (ii) a similar increase in countervailing import tariffs results in a 0.995 percent decrease in domestic purchases, underscoring a complementary relationship between China’s imported intermediates and domestic products; (iii) larger firms exhibit smaller magnitudes of domestic sales and are more likely to reduce their domestic intermediate inputs in response to a negative external risk. These findings highlight that understanding the complementary relationship between imports and domestic inputs is crucial for developing strategies to mitigate the adverse effects of tariff policies on domestic production.