How Trade Tensions Reshape Fiscal Policy: Evidence from China During the US-China Trade War

This study examines changes in China's fiscal policy before and after the US-China trade war during President Trumps first term using the Granger causality test with monthly data from January 2015 to July 2021. The findings are as follows: Before the trade war, taxation played a key role in supporting exports, controlling imports, and promoting consumption, while government expenditure had a limited impact on exports and domestic consumption. After the trade war, exchange rate volatility increasingly influenced government expenditure and tax revenues. Government spending significantly impacted exports, imports, taxes, and consumption, while taxes continued to affect exports and imports. The trade war created uncertainty in the global trade environment, challenging Chinas fiscal policy. However, the government's policy adjustments before and after the trade war showcased its flexibility and resilience, highlighting the fiscal policy's role in adapting to new economic conditions, stabilizing the economy, and sustaining international trade. This study provides insights into the potential effects of US-China trade tensions during Trumps second term and offers a basis for understanding future fiscal policy adaptations. It is recommended to enhance export competitiveness, maintain stable tax policies, adopt proactive fiscal measures, manage exchange rates, and boost domestic consumption.