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

Abstract

The 2018 U.S.-China trade war has spurred wide-spread debates about the effects of Chinese imports on U.S. society. We examine the effect of United States’ conferral of Permanent Normal Trade Relations (PNTR) on China — a policy that eliminates the uncertainty of future tariff increases for Chinese goods — on U.S. firm innovation. 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 located in the coastal area, and for firms in industries that experience a greater increase in Chinese goods following PNTR. Our evidence suggests that PNTR induces U.S. firms to innovate more.

Keywords: Permanent Normal Trade Relations, Innovation, Patents, Imports, China

JEL Classification: G38, O31