Theory and Policy Seminar, Series 208

National Academy of Development and Strategy (NADS), RUC

Theory and Policy Seminar, Series 208

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

Reported by: TAO Hanyi (School of Entrepreneurship and Management, ShanghaiTech University)

Moderator: QIN Cong (National Academy of Development and Strategy, Renmin University of China)

Time: May 23, 2025 (Friday) 14:00-15:30

Venue: Room 1133, 11th Floor, Lide Building

Abstract:

This paper examines the impact of the US-China trade war on the innovation intensity and direction in China. Using a textual analysis method to break down patent abstracts into technical terms, we compare the innovation directions of Chinese and US firms by evaluating the similarity of these terms in their patents. We find that increased exposure to US import tariffs reduces this similarity, particularly with more recent US patents. Additionally, we observe that higher US import tariffs lead to a decrease in patent filings in China. To explain these effects, particularly in terms of innovation direction, we develop a quantitative model in which firms make endogenous decisions about their innovation efforts across different product features (corresponding to technical terms in patents) and also determine their export strategies. The quantification analysis shows that the demand channel accounts for 48% of the decline in China-US innovation similarity due to tariff shocks. Moreover, changes in innovation intensity and direction choices following the trade war lead to a 6% reduction in Chinese firms' exports by 2021, with direction alone responsible for 1.68%.