Trade policy uncertainty and innovation: Evidence from China

This paper analyzes the effect of resolving trade policy uncertainty on innovation in China from 1990 to 2007. Exploiting exogenous and heterogeneous exposure to the elimination of U.S. tariff uncertainty, together with detailed innovation data, the analysis shows that reducing tariff uncertainty generated economically and statistically significant increases in innovation. This increase represents actual innovation, and not just more patent filings. The timing of the response is heterogeneous: lower-quality innovations respond quickly, while higher-quality and higher-opportunity-cost innovations respond more gradually. Innovation increases along three margins: entry into new technologies, patents with broader technological scope, and innovation within firms’ existing technological portfolios. More exposed sectors experience larger increases in first-time patenting firms. Finally, the increase in innovation is at least in part driven by exports to the US.