How did Chinese exporters manage the trade war?

This paper studies how Chinese exporters managed the recent US tariff hikes. Contrary to the conventional wisdom of horizontal trade diversion, China did not divert more of its products to other Northern countries but more to the South. Moving down the quality ladder of destinations helps Chinese exporters escape competition for high-quality products in the North and lowers penetration costs in the South. This vertical trade diversion reduces quality-adjusted export prices but raises qualities and gross prices of Chinese diverted exports, particularly in poor countries and for products with high quality scopes, implying that it may benefit the South more. • The paper investigates Chinese exporters' response to US tariffs during the 2018 trade war. • Key findings contradict conventional wisdom that China would divert trade horizontally to other Northern markets. • Instead, they adopted a Vertical Trade Diversion strategy by redirecting high-quality products to Southern countries. • This VTD strategy led to quality upgrades and increased export prices of Chinese products in poorer countries.