Does Digital Transformation in Manufacturing Affect Trade Imbalances? Evidence from US-China Trade

In the new era of the Fourth Industrial Revolution, digitalization has progressively transformed manufacturing and further affected the balance in international trade patterns. This study assesses whether and how the digital transformation in manufacturing contributes to trade imbalances. Using detailed industry-level data from the US, this study constructs an integrated evaluation to measure the level of digital transformation in manufacturing and investigates the ways in which digital transformation in manufacturing affects the US-China trade imbalance. Empirical results show that the US digital transformation in manufacturing is positively associated with the US-China total trade imbalance, which in turn is negatively associated with their related-party trade imbalance. The further analysis presents a moderated mediation model that includes the US-imported intermediate input from China (mediator for the US-China total trade imbalance), foreign direct investment in China by the US multinationals (mediator for the US-China related-party trade imbalance), and Chinese important manufacturing policy (moderator) simultaneously. The results reveal that the Chinese important manufacturing policy moderates the mediation process and the moderated mediation effect is stronger for the industries which are not involved with this policy. Our findings are informative for developing digital transformation strategies for both manufacturing firms and government authorities.