Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation

Tao Chen; Huasheng Gao; Yuxi Wang

doi:10.1016/j.jempfin.2021.02.002

Tariff Uncertainty and Firm Innovation: Evidence from the U.S.–China Permanent Normal Trade Relation

Tao Chen, Huasheng Gao and Yuxi Wang

2021 · Published in Journal of Empirical Finance 62: 12–27 · DOI 10.1016/j.jempfin.2021.02.002

PDF of Tariff Uncertainty and Firm Innovation: Evidence from the U.S.–China Permanent Normal Trade Relation (Accepted manuscript, November 2020)

In one sentence

Lower uncertainty about future tariffs on Chinese imports led affected U.S. firms to innovate more.

Summary

The paper examines how tariff uncertainty on Chinese imports affects U.S. firm innovation. It uses the U.S. grant of Permanent Normal Trade Relations (PNTR) to China, which reduced uncertainty about future tariff increases on Chinese goods. U.S. firms affected by PNTR significantly increase their patents and patent citations relative to other firms. The effect is stronger for firms with more irreversible investment and for firms that saw a larger rise in Chinese imports after PNTR. The evidence is consistent with lower tariff uncertainty making long-term, irreversible investment such as innovation more attractive.

Abstract as published

We examine the effect of the tariff uncertainty associated with Chinese imports on U.S. firm innovation. Our test exploits the U.S. conferral of Permanent Normal Trade Relations (PNTR) on China—a policy that reduces the uncertainty of future tariff increases for Chinese goods. We find a significant increase in the number of patents and patent citations for U.S. firms affected by PNTR relative to other firms. This result is stronger for firms with more irreversible investments and for firms that experience a greater increase in Chinese goods following PNTR. Overall, our evidence is consistent with the view that lowering the tariff uncertainty of Chinese imports boosts the attractiveness for U.S. firms to make long-term irreversible investment (such as technological innovation) and thus induces U.S. firms to innovate more.

Citation

Tao Chen, Huasheng Gao, Yuxi Wang (2021). Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation. Journal of Empirical Finance, 62, 12–27. https://doi.org/10.1016/j.jempfin.2021.02.002

BibTeX

@article{chen2021tariff,
  title = {{Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation}},
  author = {Tao Chen and Huasheng Gao and Yuxi Wang},
  journal = {Journal of Empirical Finance},
  year = {2021},
  volume = {62},
  pages = {12--27},
  doi = {10.1016/j.jempfin.2021.02.002}
}