The American-China Trade War and Spillover Effects on Value-Added Exports from Indonesia

This paper examines the impact of special tariffs between China and the United States (US) on their indirect trade partners via spillover effects. We applied a Value-Added Real Effective Exchange Rate (VA-REER) index to simulate how an increase in tariffs induces changes in demand for goods from Indonesia and selected Asian partners. We used the Input-Output Database (WIOD) to simulate the spillover effects across partners via the Global Value Chain (GVC) using data from 2000 to 2014. The results suggest that demand is doubly more responsive to prices (tariffs) when value-added (VA-REER) index is used instead of the conventional REER index (gross trade). We found that US tariffs on Chinese goods have a negative spillover impact on Indonesia's exports. Meanwhile, the Chinese tariffs on American goods lead to small increased demand for Indonesian exports. We also found that US and China become equally crucial for Indonesia under the Value-Added REER scheme, concluding that the conventional REER approach may have underestimated the impact of US tariffs on Chinese goods. Finally, we found that Indonesia would be at risk to trade shocks if the US applies tariffs on China, Asian partners (Japan and South Korea), and the European Union (EU).