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

Tao Chen, Huasheng Gao and Yuxi Wang

Journal of Empirical Finance, 2021, vol. 62, issue C, 12-27

Abstract: 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.

Keywords: Permanent Normal Trade Relations; Tariff uncertainty; Innovation; Patents; Imports; China (search for similar items in EconPapers)
JEL-codes: G38 O31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:62:y:2021:i:c:p:12-27

DOI: 10.1016/j.jempfin.2021.02.002

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