Permanent Normal Trade Relations Research Articles

Globalization and stock price crash risk: evidence from the US granting permanent normal trade relations to China

Globalization and stock price crash risk: evidence from the US granting permanent normal trade relations to China

The U.S.-China Trade War and Policy Resilience

Abstract One can attribute the Trump administration’s pursuit of a trade war against the People’s Republic of China (prc) to a range of variables, including its re-election hopes, commitment to protectionism as an economic weapon, fears about Beijing’s pursuit of artificial intelligence, and broader strategic concerns about the global balance of power. This article argues that another explanation for President Donald J. Trump’s ability to change trade policy towards China was the structural weaknesses of the trade policy regime that emerged at the end of the 1990s when Congress adopted Permanent Normal Trade Relations as a designation for free trade in July 1998 and the prc joined the World Trade Organization in December 2001. Those weaknesses owed much to the ways in which the United States initially framed the new trade regime with the prc and the limited, only partially conclusive, character of the debate that took place at the time. Despite the growth and embedding of supply chains between China and the United States, these inbuilt weaknesses contributed to the progressive erosion of the trade policy regime during the years that followed. Within this context, few constituencies were ready to lobby for the prc after January 2017 and the Trump administration faced little opposition to its change of trade policy.

Trade Policy Uncertainty and Enterprise Inventory Management Behavior

This paper takes the Permanent Normal Trade Relations (PNTR) granted by the United States after China's accession to the WTO as a quasi-natural experiment, and systematically examines the impact of changes in trade policy uncertainty on the inventory management behavior of enterprises using the method of multiple differences. This paper finds that the decline of trade policy uncertainty has significantly reduced the quantity of enterprise inventory, especially those exporting to the United States. From the perspective of trade policy changes, this paper provides a new explanation for understanding the dynamic changes in the quantity of Chinese enterprise inventory in recent years, and also helps to systematically evaluate the economic effects of trade policy uncertainty changes.

The impact of trade policy uncertainty on labour demand elasticity: evidence from China

ABSTRACT Research on the effect of trade on labour demand elasticity is rich, but lacks studies on the effect of trade policy uncertainty. Using firm-level labour demand elasticity data from China, this paper supplements current research by presenting evidence for the impact of trade policy uncertainty on labour demand elasticity. Using the granting Permanent Normal Trade Relations (PNTR) status by the US to China as a quasi-natural experiment, this paper constructs a difference-in-differences model. The empirical results show that a reduction in trade policy uncertainty following the grant of PNTR status significantly reduces labour demand elasticity in China. The decrease in trade policy uncertainty thereby improves employment stability. This paper reveals the importance of cultivating a stable international trade policy environment for stabilizing the domestic job market.

Trade policy uncertainty and improvement in energy efficiency: Empirical evidence from prefecture-level cities in China

In the face of the shocks from trade policy uncertainty (TPU), China needs to improve urban energy efficiency (EE) to achieve its “carbon neutrality” goals as scheduled, but the existing literature has no systematic research on this topic. This paper develops and estimates TPU and EE indexes by adopting the Bartik instrument's methods and dynamic slacks-based measure (DSBM). Furthermore, the authors conduct empirical tests on the influencing effect and transmission mechanism of falling TPU on urban EE after the US granted China permanent normal trade relations (PNTR) status in 2001 with a difference-in-difference (DID) model. The results of the empirical study show that urban EE improves by around 1.9% when TPU falls by 1%. A heterogeneity analysis also shows that a falling TPU has a more significant impact on EE in provincial capitals, open cities, “hygienic cities,” highly marketized cities, and cities with a higher share of manufacturing. Falling TPU reduces the cost of foreign capital inflow into China. It drives progress in green technologies, thus improving urban EE by replacing energy factors with innovation-driven non-energy factors. Further, export expansion and export technology complexity significantly raise the stimulating impact of falling TPU on improvement in EE, but growing processing trade impedes this impact. The findings in this study offer a new perspective on estimating the effect of China's policies to respond to global climate change against the shock from TPU and provides new evidence for strengthening global energy cooperation.

Globalization and U.S. Corporate Tax Policies: Evidence from Import Competition

This paper studies how globalization affects the corporate tax policies of U.S. manufacturing firms. Using U.S.-granting China Permanent Normal Trade Relations as a quasi-natural experiment, we find a significant increase in tax reduction activities for firms facing higher exposure to Chinese imports. The effect is more pronounced for firms with higher managerial slack. We also find that the effect is stronger for firms in less diversified products market and faster changing industries. We also show that U.S. firms facing higher Chinese import competition are more likely to engage in other tax-motivated activities: acquisition of subsidiaries in low-tax regions and suspected transfer pricing. Furthermore, we explore the 2017 tax cut and the recent U.S.-China trade dispute and find that firms engage less in tax reduction activities after the 2017 tax cut and after the tariff increase for Chinese imports. This paper was accepted by Kay Giesecke, finance.

Trade normalization, export quality, and in-migration of skilled workers: Evidence from China

The conferral of Permanent Normal Trade Relations by the United States eliminated policy uncertainty in US tariffs on Chinese exports and stimulated the exports of incumbent Chinese firms to the US market. We exploit the granting of the PNTR to examine the effect of the preference of export destinations for high-quality products on the skill utilization of firms and regional skill migration in China. Estimates show that local exports to rich markets result in substantially higher employment of skilled workers by firms and a larger inflow of skilled workers into the prefectures. We examine mechanisms and find a more substantial increase in education premium in regions with larger export expansions to rich markets from 2000 to 2005. We conclude with the importance of South-North trade in interpreting the skill upgrading of firms and interregional skill migration in developing countries. (JEL F14, F16, J24, J61, O15, O19).

Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation

Abstract We examine the effect of the tariff uncertainty associated with Chinese imports on U.S. firm innovation. Our test exploits the U.S. conferral of Permanent Normal Trade Relations (PNTR) on China—a policy that reduces the uncertainty of future tariff increases for Chinese goods. We find a significant increase in the number of patents and patent citations for U.S. firms affected by PNTR relative to other firms. This result is stronger for firms with more irreversible investments and for firms that experience a greater increase in Chinese goods following PNTR. Overall, our evidence is consistent with the view that lowering the tariff uncertainty of Chinese imports boosts the attractiveness for U.S. firms to make long-term irreversible investment (such as technological innovation) and thus induces U.S. firms to innovate more.

Trade liberalization and child labor

This paper exploits a quasi-natural experiment – the U.S. granting of Permanent Normal Trade Relations (PNTR) to China after China's accession to the World Trade Organization – to examine whether trade liberalization affects the incidence of child labor. PNTR permanently set U.S. duties on Chinese imports at low Normal Trade Relations (NTR) levels and removed the uncertainty associated with annual renewals of China's NTR status. We find that the PNTR was significantly associated with the rising incidence of child labor in China. A one percentage point reduction in expected export tariffs raises the odds of child labor by a 1.2 percentage point. The effects are greater for girls, older children, rural children, and children with less-educated parents. The effect of trade liberalization on the incidence of child labor, however, tends to weaken in the long run, probably because trade liberalization can induce exporters to upgrade technology and thus have less demand for unskilled workers.

Board structure, director expertise, and advisory role of outside directors

We investigate how a shock to corporate demand for experienced directors (i.e., U.S. Congress’ grant of Permanent Normal Trade Relations status to China in 2000) affects U.S. firms’ board structure and board advisory role. We find that firms appoint more outside directors with China-related experience after the grant. Firms with such directors realize higher returns around announcements of investments involving Chinese firms and better post-deal operating performance, particularly when these directors reside in the U.S. The appointment of directors with China experience is also greeted more positively by the stock market and they gain more board seats after the grant.

Import Competition and Worsening Labour Relations: Evidence from China's WTO Accession

I study the effect of Chinese import competition on unions in the United States, whose decline has mirrored that of manufacturing. I examine two channels through which unions might have been affected: 1) differences in the extent to which the China shock negatively impacted firms in unionized industries relative to firms in non-unionized industries and 2) the formation of new unions and dissolution of existing unions. I exploit the US’s granting of Permanent Normal Trade Relations (PNTR) status to China upon its entry into the WTO, which increased Chinese import exposure by removing significant amounts of trade policy uncertainty that varied across industries. I find evidence that firms in unionized industries reacted more negatively than firms in non-unionized industries, conditional on receiving the same trade uncertainty reduction shock. Interestingly, I do not find that there is a significant effect of the China shock on the incidence of union representation cases. I do find that the incidence of work stoppages initiated both by employers and workers increases, suggesting that both sides increase pressure on the other in a bid to increase bargaining power under the shadow of increased import exposure.

Trade and Welfare (Across Local Labor Markets)

What are the welfare implications of trade shocks? We provide a sufficient statistic that measures changes in welfare, to a first-order approximation, taking into account adjustment in labor supply, in frictional unemployment, and in the sectors to which workers apply while allowing for arbitrary heterogeneity in worker productivity and nonpecuniary returns across sectors. We apply these insights to measure changes in welfare across commuting zones (CZs) in the U.S. between 2000-2007. We find that granting China permanent normal trade relations lowers the welfare of a CZ at the 90th percentile of exposure by 3.1 percentage points relative to a CZ at the 10th percentile; of this, approximately 65 percent is due to changes in unemployment and much of this is driven by the non-pecuniary costs of unemployment. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Learning the Ropes? Executive Experience and Location Choices of Multinational Firms

What makes firms invest in foreign countries? In this paper, I show that beyond country- and firm-specific characteristics, experience of executives is crucial to understand multinational enterprises' location choices. Using a dataset on executives and subsidiaries of S&P 1500 firms, I find that hiring an executive having previously worked for a company that had at least one subsidiary in a given country increases the average probability to own subsidiaries in this country by 14 percent after three years. Moreover, I observe a similar effect at the intensive margin and a wage premium for experience in managing multinational activities. A causal interpretation of the results is possible by using movements due to unexpected events as sources of exogenous shocks (e.g., death of incumbent executives) and by exploiting the conferral of Permanent Normal Trade Relations status on China as a quasi-natural experiment. Altogether, the findings suggest that executives develop country-specific knowledge, a valuable asset in the labor market that helps companies intensify their presence abroad.

Effects of Chinese Imports on U.S. Firm Innovation: Evidence from the U.S.-China Permanent Normal Trade Relation

The 2018 U.S.-China trade war has spurred wide-spread debates about the effects of Chinese imports on U.S. society. We examine the effect of United States’ conferral of Permanent Normal Trade Relations (PNTR) on China — a policy that eliminates the uncertainty of future tariff increases for Chinese goods — on U.S. firm innovation. We find a significant increase in the number of patents and patent citations for U.S. firms affected by PNTR relative to other firms. This result is stronger for firms located in the coastal area, and for firms in industries that experience a greater increase in Chinese goods following PNTR. Our evidence suggests that PNTR induces U.S. firms to innovate more.

Import Competition and Internal Migration

Abstract We examine the U.S. internal migration response to increased import competition following the granting of Permanent Normal Trade Relations to China in 2001. Using a variety of data sets and empirical approaches, we find that local labor markets most exposed to the policy change experienced a relative reduction in population growth over the following decade. The majority of the effect occurs at a lag of seven to ten years and is most pronounced among young individuals and low-education groups. Such population adjustments should influence the interpretation of evidence in the growing literature on import competition and local labor markets.

The unintended effect of import competition on corporate tax avoidance

The role of competition in corporate tax avoidance is theoretically unclear in the existing literature. This paper empirically examines this role, with a focus on import competition. I exploit financial statements to measure tax avoidance of US-listed firms and the conferral of Permanent Normal Trade Relations status on China as a quasi-natural experiment to establish causality. The results reveal that import competition fosters corporate tax avoidance. However, the effect is heterogeneous across firms. The average effect is driven by multinational enterprises, and more specifically by those implanted in tax havens. In response to the China shock, these firms invested in intangible assets to escape competition, but these intangibles also allowed them to intensify their profit shifting activities. These findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the current backlash against large corporations and globalization, and the calls for reform of the international tax system.

The costs and benefits of exchange rate protection in China

From 2002 to 2011, China ran large surpluses in both the current and capital accounts of its balance of payments, which the People's Bank of China (PBOC) purchased and held at official foreign reserves to avoid nominal appreciation of the currency. Concurrently, with its massive purchases of foreign exchange, the PBOC compelled commercial banks to buy PBOC ‘sterilisation bonds’ and raised commercial bank reserve requirement ratios to avoid monetisation of its foreign exchange purchases and concomitant upward pressure on the price level (that is, real appreciation of the currency). Sterilising foreign exchange intervention, as China did for a decade, constitutes a violation of the implicit rules of a fixed exchange rate regime and as such can be seen as a mercantilist policy of manipulating the real exchange rate to gain, or avoid losing, international price competitiveness—what Corden (1981) termed ‘exchange rate protection’. This paper sets out the simple theory of the costs and benefits of exchange rate protection and provides back‐of‐the‐envelope estimates of their magnitude in China in the 2000s. It also explores the ‘other side of the story’, the decline in US manufacturing employment in the 2000s, which recent literature attributes to a ‘China Trade Shock’ that allegedly resulted from the US granting Permanent Normal Trade Relations (PNTR) to China in 2001. Here, it is argued that the so‐called China Trade Shock resulted from China's sterilised intervention policy, not the granting of PNTR. The implications of these competing hypotheses are considered in the conclusions.

Globalization and U.S. Corporate Tax Policies: Evidence From Import Competition

This paper studies how globalization affects the corporate tax policies of U.S. manufacturing firms. Using U.S. granting China Permanent Normal Trade Relations as a quasi-natural experiment, we find a significant increase in tax reduction activities for firms facing higher exposure to Chinese imports. The effect is more pronounced for firms with higher managerial slack. We also find that the effect is stronger for firms in less diversified products market and faster changing industries. We also show that U.S. firms facing higher Chinese import competition are more likely to engage in other tax-motivated activities: acquisition of subsidiaries in low-tax regions and suspected transfer pricing. Furthermore, we explore the 2017 tax cut and the recent U.S.-China trade dispute, and find that firms engage less in tax reduction activities after the 2017 tax cut and after the tariff increase for Chinese imports.

Board Structure and Advisory Role of Outside Directors: Evidence From U.S. Legislation Granting China Permanent Normal Trade Status in 2000

We investigate how a shock to corporate demand for experienced directors (i.e., U.S. Congress’ grant of Permanent Normal Trade Relations status to China in 2000) affects U.S. firms’ board structure and board advisory role. We find that firms appoint more outside directors with China-related experience after the grant. Firms with such directors realize higher returns around announcements of investments involving Chinese firms and better post-deal operating performance, particularly when these directors reside in the U.S. The appointment of directors with China experience is also greeted more positively by the stock market and they gain more board seats after the grant.

A coalition approach to trade policymaking in the United States: the fast-track authority fiasco of 1997 and the approval of Permanent Normal Trade Relations (PNTR) with China in 2000

Abstract This article proposes a framework centered on coalitions between the executive, the congress and interest groups for the analysis of the US trade policymaking process. Such a framework is focused on two main concepts, “willingness to bargain” and “pivotal actor”. The work advances two main hypotheses related to the ability of pro-free-trade actors to come to an agreement and anti-free-trade actors to effectively oppose trade liberalization. Two case studies are undertaken in order to check the plausibility of such hypotheses: the fast-track fiasco (1997) and the approval of Permanent Normal Trade Relations (PNTR) with China (2000).