Recently, the Center for International Finance and Economics Research (CIFER) of the National Institute of Financial Research at Tsinghua University hosted...Academic Symposium on "2022 International Trade Disputes and the Restructuring of Globalization"The event was successfully held.Assistant Professor, Faculty of Business Administration, University of MacauLi ShaozhiAttendDepend onCIFERDirector, Professor of Tsinghua University PBC School of FinanceJu JiandongHostInternational trade disputesSub-forum 1Sharing with collaborators on the topic《The impact of the US-China trade war on innovation in Chinese enterprises》(The Effect of the U.S.–China Trade War on Chinese Corporate Innovation) The article.
Li Shaozhi She is an Assistant Professor of Business Economics at the Faculty of Business Administration, University of Macau. She holds a Bachelor's degree from Peking University, a Master of Arts degree from Columbia University, and a PhD from the Chinese University of Hong Kong. Her research areas include economic development, international trade, and entrepreneurship.
Li Shaozhi
By utilizing tariff changes during the US-China trade war, we found that escalating US tariffs promoted relative R&D spending by listed manufacturing companies in China. This paper infers the degree of competitive pressure on firms from their annual reports, thereby identifying a competition-induced mechanism and discovering the motivations for firms to avoid competition. The marginal treatment effect of tariff increases is more significant for other (non-US) exporting companies and those initially in highly competitive industries. The paper further employs different approaches to address potential endogeneity issues, with robust results. This is the first comprehensive study of the impact of adverse trade policy shocks on innovation behavior in source countries, offering insights for academic research and policymaking in the current context of rising trade protectionism.During periods of export expansion, it is generally believed that increased access to foreign markets fosters innovation, particularly for large manufacturing companies. This paper provides new evidence for firm innovation behavior in the context of deglobalization and elucidates the underlying mechanisms through empirical identification using the US-China trade dispute.In robustness tests, our results remain consistent across different tariff exposure measures, different estimators and model settings, and extended sample periods. We also consider confounding scenarios of trade dispute policy interventions and report similar findings. Furthermore, we discuss the endogeneity issues related to high-tech products. Our findings indicate that (1) given the unconventional nature of the Trump administration, US tariff escalations have not been strategically focused on high-tech products overall; and (2) the estimates are insensitive to excluding high-tech samples and remain robust after considering linear time trends in specific quartile industries and various initial firm conditions. Finally, following Ma et al. (2022), we utilize the heterogeneity of multiple rounds of tariff increases and unexpected product exemptions for empirical identification. In all cases, we report a significant positive correlation between Chinese firm R&D investment and US tariff escalations, which strengthens the causal explanation for our baseline regression estimates.Market size and the induced competition effect are core mechanisms linking export opportunities and domestic innovation. First, we find that companies at higher risk of U.S. tariff shocks show no statistically significant difference in revenue or profit. We discuss the lack of a negative market size effect, which we believe may stem from the competitiveness of publicly traded companies. Faced with adverse trade policy shocks, efficient Chinese exporters to the U.S. tend to adjust their sales and development strategies to adapt to the domestic market and/or other export destinations. Therefore, due to increased competition, the U.S. tariff shock immediately spreads among similar companies in other non-U.S. export sectors. This channel of induced competition is evident from the annual reports of publicly traded companies and, in conjunction with findings on different trade patterns of Chinese exports and their redistribution of business in the post-trade war period.To empirically assess the channel of induced competition, this paper constructs two measures of keyword density using annual reports from each company in the sample between 2015 and 2019: phrases mentioned by each company related to “developing new markets” and “trade-related market competition.” By using these keyword densities as the dependent variable, the paper shows that Chinese companies are more vulnerable to US tariffs in industries with higher exposure to US tariffs. In comparison, this paper finds that marginal trade shocks are more significant for industries with smaller gaps in initial total factor productivity (TFP) between US exporting companies and other companies in the industry, consistent with the motivation to avoid competition.This study makes three main contributions. First, a broad body of current research aims to understand the impact of international trade on innovation behavior and access to imported intermediate goods from different perspectives of export expansion. This paper raises the question of how the collapse of export opportunities affects the innovation efforts of domestic firms. Second, the unexpected tariff shocks during the US-China trade war, compared to selected antidumping cases, provide a unique opportunity for a more comprehensive study. Our analysis of Chinese listed companies reveals that negative foreign trade policy shocks can create a competitive mechanism, leading to proactive R&D responses in both exporting and non-exporting countries.Second, mechanism relevance, market size, and competitive effects are central to the trade-innovation relationship. The findings of this paper offer significant reference value for theoretical research on normative economic behavior in the context of deglobalization. Furthermore, the textual analysis used in analyzing channels of induced competition is novel and complements existing outcome-based indicators. This is particularly important for elucidating the mechanisms by which firms evade competition. By definition, evasion motives include taking actions to increase innovation to curb potential threats and fend off competitors; therefore, successful evasion processes may not be fully observable in the short term through traditional outcome-based indicators such as changes in sales or market concentration. This study provides a useful indicator and expands the scope of recent applications of textual analysis in economic research.Third, this paper expands upon the developing literature on the economic consequences of the US-China trade war. In the US, studies have investigated the impact of the trade war on various aspects of the US economy and society, such as direct effects on domestic prices, consumption, investment, and employment. In China, new research indicates that the trade war has a deterrent effect on income and manufacturing employment, new company registrations, and corporate hiring decisions. Our study is closely related to that of Benguria et al. (2022), both of whom explored the effects of the trade war using a sample of Chinese listed companies. However, while they focused on trade-induced uncertainty, we assessed firms' innovative responses to actual tariff changes. Whether China, as the largest developing economy, can continue its transition from an investment-driven growth model to a more innovation-based model under a protectionist trade environment is an important question with both policy and academic implications.
Su Li
School of Applied Economics, Renmin University of ChinaAssociate ProfessorSustandThis is considered a very solid and comprehensive article. It analyzes the innovation activities of listed companies in relation to the US-China trade dispute, highlighting the differences between listed company analysis and enterprise analysis. First, listed companies often have dispersed equity governance; therefore, it's important to examine the presence of foreign capital and consider its impact. Second, many events during the sample selection period can influence corporate innovation, such as the 19th National Congress of the Communist Party of China, which served as a crucial guide and driving force for innovation. The confusion between causal identification and impact effects needs careful consideration. Third, the existence of zero values in the explained variable can lead to regression bias. When analyzing the effects of the US-China trade dispute, the annual reports of listed companies are audited, and using annual data may introduce bias; quarterly and interim reports are recommended. Finally, the article explores whether corporate governance can be used to analyze mechanisms and channels.
