Is technological innovation a push for trade friction?

Abstract

This study analyses the interrelation between technological innovation (TI) and trade friction (TF) by applying the bootstrap rolling-window full- and subsample Granger causality test from China in a sample from January 2002 to December 2021. Results show that the influence of TI on TF is twofold. On the one hand, TI is a push for TF. This finding is consistent with the ‘income effect’, which postulates that TI leads to more TF by affecting the income of other countries. On the other hand, TI has a negative influence on TF. This result confirms the ‘substitute effect’, implying that TI can benefit consumers by providing more high-quality and cheaper products. In turn, TF can hinder TI by reducing exporters’ profits. Based on these findings, governments should coordinate their efforts toward innovation and trade policies. At the same time, firms should master core technology and develop their high-performance products to avoid the risk of TF.