Leona Shao Zhi Li (et al.) from the University of Macau claims the work highlighted today is “..the first comprehensive study to examine the impact of [An] adverse foreign trade policy shock on innovation responses in the source country,..”.
I’m sure this is correct, but it’s sad to note only recently has data on this phenomena become available for such a study; because for the last 90-or-so years we haven’t been seeing much of this behavior.
Previous studies on the effects of increased market size due to greater export opportunities have shown as firms increase their business their R+D goes up. So, you’d think if we had a chance to investigate what happens if we put globalization into reverse, we’d see the reverse?
Not in China’s case. The aggregate R+D of Chinese export manufacturing companies (only listed companies between 2015~2019), as a direct response to the increase in U.S. tariffs in 2018, went up.
The mechanism by which this occurred though is particularly interesting. The very biggest and best run companies responded to the tariffs by seeking new markets. This in turn dialed up competition at home and in other places where business was already tough forcing incumbents to respond with, among other countermeasures, increased R+D expenditure.
The research concludes noting these effects may not be permanent as the one off shock-response may neither be continued into the future nor work in time in the same way (but I’ll bet it is, and does).
What’s clear though, for the larger companies in the survey at least, is proof of the maxim penned in 1888 by Friedrich Nietzsche; “Was mich nicht umbringt, macht mich stärker” or as most of us know it, that which doesn’t kill me makes me stronger.
A cautionary tale for other governments considering a saunter down Smoot-Hawley Alley.
You can access the paper directly via the following link Tariffs and R+D.
Happy Sunday.