Chinese Firms in the Trade War: Decoupling through Reshoring?

• In Event: Political Risk and Foreign Direct Investment

Abstract

This paper leverages firm-level data to examine the impact of the U.S.-China trade war on the greenfield investment of Chinese investors. Our research yields a few interesting findings. Importantly, our results present a mixed set of findings to the “tariff-jumping” argument. In a longitudinal analysis of Chinese investors, the tariffs by themselves have had a negligible impact on Chinese investment, either in the U.S. or elsewhere in the world, while an extension focusing on cross-sectional variation showed some evidence of more investment in sectors affected by US tariffs. Nor have the tariffs resulted a perceptible shift in China’s investment flows toward BRI countries. However, our analysis did generate some evidence that the trade war may have incentivized Chinese investors to increasingly invest in countries with good political ties with Beijing, presumably as a buffer against potential downturns in bilateral relations. It may also have resulted in a reduced willingness by Chinese SOEs to engage in overseas investment. Overall, these findings help to illuminate the extent to which policies of “decoupling” may have been effective in inducing shifts in Chinese investors’ investment patterns, at least in the short-run.

Authors

• Soo Yeon Kim, University of British Columbia

• Ka Zeng, University of Massachusetts Amherst