The Unintended Consequences of Tariff Retaliation: Evidence from the Chinese Automobile Market

Abstract

This paper adopts a novel perspective to assess the direct and spillover impacts of tariff wars in the context of globalized production and social media. Using automobile sales data in China that contain each product’s country of production and country of origin, we find that China’s retaliatory tariffs against the U.S. increased sales of U.S. imports, increased sales of U.S. brands in the import segment, and decreased sales of China-made U.S. brands in the domestic segment. The sales increase in the import segment was due to the advertising effect of the tariff war; the sales decrease in the domestic segment resulted from consumer boycotts triggered by the tariff war. The net sales impact on U.S. brands was negative due to the much larger market share of the domestic segment, while the net profit impact on U.S. brands was positive due to the much higher margins for imported cars. The heterogeneous responses of different consumer segments suggest that a tariff war in an era of globalization and social media can be counterproductive and have unintended consequences.