Trade networks and firm value: Evidence from the U.S.-China trade war
Project Description
In an era dominated by geopolitical tensions, the 2018-2019 U.S.-China trade war offers a pivotal case for examining the repercussions of trade policies on firm value and global supply chains. This paper delves into the financial consequences of the increased tariffs levied during this period, particularly focusing on the U.S. firms that are heavily engaged in trade with China. The findings indicate that announcements of tariff hikes correlate with substantial market value reductions in these firms, with these effects also impacting their suppliers and customers, demonstrating the extensive interconnectivity of modern production networks.
This trade conflict represents a major shift from previously stable global trade relations, necessitating an understanding of how such economic policies influence firm-level valuation and supply chain dynamics. Our research is pioneering in its systematic exploration of the relationship between trade policy uncertainty and firm value, especially emphasising the role of intricate supply chain networks in disseminating economic shocks. Unlike prior studies that concentrated on broader trade flows or sector-wide effects, our analysis offers a detailed examination at the firm level, utilising specific product lists to assess variations in tariff exposure.
Moreover, this study introduces U.S. import data, enriching the analysis of international trade impacts. We focus on firms importing differentiated inputs from China, identifying these entities as particularly susceptible to tariff changes, due to their reliance on specialised, less substitutable inputs from Chinese suppliers.
Additionally, we leverage the 2019 trade talks as a reverse experiment to observe potential reversals in the negative impacts recorded during the trade war's peak. This scenario provides a natural experiment setting to analyse the mitigating effects of reduced trade tensions.
The theoretical framework of this paper underscores how specific trade structures and firm characteristics, like R&D intensity and the nature of imported inputs, critically influence the economic outcomes of trade policies. By melding empirical data with theoretical insights, this study advances our understanding of the U.S.-China trade war’s economic implications and contributes broader insights into how contemporary trade conflicts affect global economic stability and individual firm health. This work's timely significance is reflected in its extensive citation, marking it as a substantial contribution to the field.
Project Investigator
Dr LIU Sibo (Department of Accountancy, Economics and Finance)
Project Collaborators
- Yi Huang (Bank for International Settlements)
- Chen Lin (University of Hong Kong)
- Tang Heiwai (University of Hong Kong)
Publication
Huang, Y., Lin, C., Liu, S. and Tang, H., 2023. Trade networks and firm value: Evidence from the US-China trade war. Journal of International Economics, 145, p.103811. https://www.sciencedirect.com/science/article/abs/pii/S0022199623000971
