U.S.-China trade war and corporate reallocation: Evidence from Chinese listed companies

Abstract

This paper applies a difference-in-differences framework to explore the economic consequences of the recent U.S.–China trade war. The average abnormal returns of Chinese listed firms during a period centered on President Trump's announcement on 22 March 2018 are taken as a proxy for the firms' exposure to the potential trade war. Firms more negatively exposed are found, surprisingly, to report higher total revenues in the post-announcement period. The results indicate that the Chinese firms tend to reallocate their business from overseas to the domestic market. Such within-firm reallocation is found to be more pronounced among private firms, exporting firms and non-FDI firms. Besides, firms with higher negative exposure increase total investment and financing but decrease foreign investment after the trade war.