Trade Policy Uncertainty and Innovation: Evidence from China

This paper studies the effect of resolving trade policy uncertainty on innovation in China during 1990-2007. It exploits exogenous and heterogeneous exposure to tariff uncertainty resolution arising from a change in US trade policy, which eliminated the possibility of tariff increases, and detailed data on innovation from all sectors and countries in a triple difference-in-differences. Eliminating uncertainty has an economically significant effect on innovation, and this effect represents actual innovation, rather than more patent filings. Next, the paper studies the mechanisms that led to this innovation response and shows that the increase in innovation reflects a response on three margins: the introduction of patents in new technologies, patens with increased technological scope, and patents in a firm’s pre-period technology portfolio; that relatively more exposed sectors exhibit a larger increase in firms patenting for the first time; and that the increase in innovation is driven by exports to the US.