Chinese firms tend to invest more efficiently when facing higher duties or import restrictions, according to a study that highlights an unexpected benefit of tariffs by analysing data from before the two trade wars with the United States.
Published in the peer-reviewed Journal of Corporate Finance, the paper examined more than 2,700 listed firms in China, their financial and accounting data from 2003 to 2016, and the trade barriers imposed on the country during this period.
Trade defence instruments (TDIs), such as anti-dumping or countervailing duties, have largely prompted Chinese companies to allocate capital more effectively, according to the paper. This was especially true for cash-rich firms that lacked strong governance, where unchecked investments had been more common.
“Our findings reveal a nuanced dynamic, showing that trade protection measures, such as TDIs, can have complex and counterintuitive effects on target firms’ resource allocation and the broader economy.”
The authors called trade shocks an “external disciplining mechanism” that reduces free cash flow and curbs overinvestment, where excessive resources are poured into underperforming projects.
