The Impact of the Trade War: Divergence in Chinese and U.S. Innovations in the Post-Conflict Era

Abstract: This paper investigates the impact of the US-China trade war on China’s innovation activities and the link between Chinese new technology and the US. Employing textual analysis to gauge the resemblance of China’s patents to the recent and past US patents, the paper finds that an increase in the firm-level exposure to US export tariffs results in a decrease in the similarity of China’s patents to US patents, particularly the most recent ones. Innovations from different countries do not adhere to a single quality ladder but are multi-faceted, as evidenced by the fact that China’s innovation similarities to other developed countries decline at heterogenous magnitudes. Furthermore, this paper finds that the export tariff reduces both R&D investment and patent filings in China, while tariffs on imports from the US show no significant influence. We develop a model featuring firm-level export and innovation decisions on multiple products towards countries with heterogeneous preferences to elucidate the mechanism. The model predictions are consistent with the empirical findings, and we provide further evidence to illustrate the impact of innovation activities on firm performance.