This paper investigates the trade diversion and trade deflection impacts of the 2018 United States-China trade war on Commonwealth member countries. Employing a difference-in-differences (DiD) regression approach involving 54 countries and over 5200 HS six-digit products, our main estimated result reveals that the United States-China trade war has a heterogeneous trade diversion effect on exports from Commonwealth member countries to the United States. In particular, our regression analysis demonstrates that the United States-China trade war has a positive short-run trade diversion effect on developed Commonwealth member countries, especially in the case of finished industrial product exports. Furthermore, the sudden increase in United States tariffs on Chinese export products has significantly reduced imports of intermediate industrial products from China to Commonwealth countries. This finding suggests that the trade conflict has disrupted the integration of global value chains (GVCs) by increasing the cost of Chinese inputs, thereby making it less economically viable for companies in Commonwealth countries to continue sourcing from China. Our mechanism analysis also confirms that the trade diversion effect was significantly driven by the geopolitical proximity of Commonwealth member countries with the United States, China or Russia. Commonwealth member countries with a higher geopolitical proximity with the United States tended to increase exports to the United States after higher tariffs were imposed on Chinese products. Conversely, United States imports notably decreased from Commonwealth countries that have larger geopolitical proximity with China or Russia. This indicates the significant role of geopolitical alignment between countries in driving trade diversion following the tariff change shock.
