Open Seas

Kevin Lewis

March 27, 2024

Political Costs of Trade War Tariffs
Edward Mansfield & Omer Solodoch
Journal of Politics, forthcoming

We analyze whether -- and, if so, how -- Americans reacted to the escalation of the trade war between the United States and China in June 2018. To address this issue, we leverage surveys conducted in the U.S. during this phase of the economic clash. We find a significant reduction in support for Donald Trump and his trade policy immediately following the announcement of retaliatory tariffs by the Chinese government. Moreover, respondents’ economic concerns about the trade war were primarily sociotropic and only weakly related to personal pocketbook considerations or local exposure to Chinese retaliatory tariffs. We also find that the trade war’s intensification was politically consequential, decreasing support for Republican candidates in the 2018 midterm elections. Our findings indicate that trade wars can be politically costly for incumbent politicians, even among voters who are not directly affected by retaliatory tariffs.

The Future of Global Economic Power
Laurence Kotlikoff et al.
Boston University Working Paper, December 2023

The global economy's enormous region-specific demographic, technological, and fiscal changes raise key questions. Which regions will come to dominate the world economy? Will regional levels of per capita GDP converge? Will high saving rates in fast growing regions lead to a global capital glut? Does aging augur far higher tax rates in particular regions? This paper develops the Global Gaidar Model, a 17-region, 2-skills, 100-period, OLG model, to address these questions. Productivity growth and its interaction with demographic change are the main drivers of future economic power. Our baseline predicts China and India becoming the world's largest two economies with 27.0 percent and 16.2 percent of 2100 world GDP, respectively. U.S. and Western European 2100 global GDP shares are 12.3 percent and 11.9 percent. Our baseline features an evolving global savings glut, major reductions in the world interest rate, aging-related increases in taxation, and permanent differences in regional living standards.

Globalization and Profitability of US Firms: The Role of Intangibles
Bullipe Chintha, Ravi Jagannathan & Sri Sridhar
NBER Working Paper, March 2024

China's admission into the WTO in 2001 heralded a new era of globalization, increasing both import competition in domestic markets and foreign opportunities for US firms. In the aggregate, the average annual profitability of US public firms during the post globalization period (2003-2019) increased by 11.5% of the corresponding pre-globalization period (1984-2002) profitability. This increase in overall aggregate profitability was primarily driven by foreign profitability increasing by 47.4% for firms in the S&P 500 index, which are larger and have more intangible assets created by R&D and SG&A expenditures. In contrast, following globalization, the average aggregate domestic profitability of US firms remained flat, and firms employed more capital to generate sales. Firms with higher intangible assets benefited more from globalization.

Appropriate Entrepreneurship? The Rise of China and the Developing World
Josh Lerner et al.
NBER Working Paper, March 2024

Global innovation and entrepreneurship has traditionally been dominated by a handful of high-income countries, especially the US. This paper investigates the international consequences of the rise of a new hub for innovation, focusing on the dramatic growth of high-potential entrepreneurship and venture capital in China. First, using comprehensive data on global venture activities, we show that as the Chinese venture industry rose in importance, entrepreneurship increased substantially in other emerging markets, particularly in sectors dominated by Chinese companies. Using a broad set of country-level economic indicators, we find that this effect was driven by country-sector pairs most similar to their counterparts in China. Second, turning to mechanisms, we show that the baseline findings are driven by local investors and by new firms that more closely resemble existing Chinese companies. Third, we find that this growth in emerging-market investment had wide-ranging positive consequences, including a rise in serial entrepreneurship, cross-sector spillovers, innovation, and broader measures of socioeconomic well-being. Together, our findings suggest that developing countries benefited from more “appropriate” businesses and technology pioneered by China, and that a system where only rich countries lead in innovation could limit entrepreneurial activity in large parts of the world.

Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050
George Alessandria et al.
NBER Working Paper, February 2024

We use the dynamics of U.S. imports across goods in the period around the U.S.-China trade war with a model of exporter dynamics to estimate the dynamic path of the probability of transiting between Normal Trade Relations and a trade war state. We find (i) there was no increase in the likelihood of a trade war before 2018; (ii) the trade war was initially expected to end quickly, but its expected duration grew substantially after 2020; and (iii) the trade war reduced the likelihood that China would face Non-Normal Trade Relations tariffs in the future. Our findings imply that the expected mean future U.S. tariff on China rose more under President Biden than under President Trump. We also show that the trade response to the trade war is similar to the response to the 1980 liberalization that initially granted China access to U.S. markets at NTR terms and was expected to be quickly reversed.

Belt and road initiative membership and voting patterns in the United Nations General Assembly
Christoph Steinert & David Weyrauch
Research & Politics, February 2024

The Belt and Road Initiative (BRI) is not only an unprecedented cross-continental infrastructure investment program, it is also a key pillar of China’s foreign policy. The Chinese government seeks to tie BRI member states closer to its political system and to enhance its soft power across the globe. Whether this has been successful has been analyzed for individual countries but, as of yet, there is a paucity of cross-national evidence on the geopolitical impact of the BRI. We collected a novel global dataset on bilateral cooperation agreements with China in the context of the BRI for all states across the globe. We rely on voting similarities in the United Nations General Assembly (UNGA) to analyze whether the decision to join the BRI is linked to geopolitical alignment with China. We apply generalized synthetic control models and community detection algorithms to estimate the impact of BRI membership on voting similarity to China. Our findings show that the signature of BRI membership agreements had no discernible short-term impact on voting similarity to China in most regions of the world. The exception is Europe, where BRI membership induced a backlash against China. Our findings suggest that European states counter-balance to the US and signal their independence from China after signing a BRI agreement.

Mapping U.S.–China Technology Decoupling: Policies, Innovation, and Firm Performance
Pengfei Han, Wei Jiang & Danqing Mei
Management Science, forthcoming

We develop measures of technology decoupling and dependence between the United States and China based on combined patent data. The first two decades of the century witnessed a steady increase in technology integration (or less decoupling), but China’s dependence on the United States increased (decreased) during the first (second) decade. Firms covered by China’s Strategic Emerging Industries policies became less decoupled with the United States, gained cash flows, and gained valuation, but they saw no improvement in either innovation output/quality or productivity. Post-U.S. sanctions, firms in sanctioned sectors and their downstream suffered in performance but also became less decoupled with the United States. However, firms in the upstream of the sanctioned sectors improved productivity and produced more high-quality innovations.

Who Pays a Visit to Brussels? Firm Value Effects of Cross-Border Political Access to European Commissioners
Kizkitza Biguri & Jörg Stahl
Journal of Financial and Quantitative Analysis, forthcoming

We analyze meetings of firms with policymakers at the European Commission (EC). Meetings with Commissioners are associated with positive abnormal equity returns for US firms. Firms of the European Union (EU), however, do not experience significant value increases. We identify regulatory outcomes as a channel that can rationalize this difference in value effects of political access. US firms with meetings are more likely to receive favorable decisions in their EC merger decisions than their EU peers. The results suggest that cross-border political access can alleviate uncertainties and alleged discriminatory behavior of regulators in foreign markets.


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