Trade Policy Uncertainty, Innovation and Total Factor Productivity

This paper explores the impact of trade policy uncertainty (TPU) shock on China’s total factor productivity. Using economic panel data for China, OECD countries, Hong Kong SAR, Macao SAR, and Singapore from the period 2003–2019, in this paper, we treat U.S.–China trade frictional events in 2016 and 2017 as a quasi-experiment to study the impact of TPU surge on China’s TFP under the synthetic control method (SCM) and generalized synthetic control method (GSCM), treating the OECD countries, Hong Kong SAR, Macao SAR, and Singapore as a control group. We found that TPU surge has a significantly negative causal effect on China’s TFP. SCM analysis, taking 2016 (2017) as the policy implementation time, showed that the average TFP loss borne by China due to trade policy uncertainty in 2017 and 2018 was 2.7% (3.5%). The VAR model showed that China’s trade policy uncertainty reduces China’s TFP through two channels: the shrinking channel of domestic R&D innovation, and the shrinking channel of the domestic sector’s use of foreign patents. This conclusion is robust according to the GSCM. To the best of the authors’ knowledge, this paper is the first attempt to examine the long-term technological impact of TPU surge during U.S.–China trade frictional events. Our findings suggest that trade friction harms technological progress, and reducing TPU can significantly enhance innovation and TFP.

The USA–China trade policy uncertainty and inference for the major global south indexes

PurposeThe recent dynamics of trade policy, especially that is associated with the United States of America (USA) and China, has not only triggered policy adjustments in two economies, it has also implied an uncertainty spillover to other economies across the globe. Consequently, the current study attempts to examine the effect of uncertainties in the USA–China trade policies on stock market indexes. In addition, the cointegration evidence between the USA–China trade policy uncertainty index and of the leading Global South fragile quintet (Brazil, Indonesia, South Africa, India and Turkey) stock market indices is investigated.Design/methodology/approachMainly, the FMOLS and DOLS Granger causality analysis with cointegration coefficient estimators were employed for the dataset over the monthly data period of March 2003 and July 2019.FindingsAccordingly, the study found a long-term relationship between the USA–China Trade Policy Uncertainty index and the stock exchange indexes. In addition, a causal relationship was established from the change in the USA–China Trade Policy Uncertainty index to the change in the stock market indexes of almost all of the examined countries (Brazil, Indonesia, South Africa, India and Turkey). In addition, the nonlinear Autoregressive Distributed Lag approach further offers evidence of asymmetric relationship among the examined indicators.Originality/valueMoreover, this study contributed to the existing literature because it employed the indexes of BIST100, BOVESPA, BSE Sensex 30, IDX Composite and South Africa 40 in a novel approach. Thus, the study posited a useful policy guideline for associated economic uncertainties arising from the trade dispute, such as the case of the world’s two largest trading giants or partners (i.e. the USA and China).