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Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation |
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| Affiliation: | 1. Institute of Guangdong, Hong Kong and Macao Development Studies, Center for Studies of Hong Kong, Macao and Pearl River Delta, Sun Yat-sen University, Guangzhou 510275, China;2. School of Economics and Trade, Guangdong University of Finance, Guangzhou, China;1. Faculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 0EE, United Kingdom;2. School of Economics, Nanjing University, 22 Hankou Road, Nanjing, Jiangsu 210093, China;3. CRPE and School of Economics, Zhejiang University, 38 Zheda Road, Hangzhou, Zhejiang 310028, China |
| 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 |
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