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Sylvia Ma

Leopold Chen

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.
The paper was released in April when Chinese exporters faced renewed trade turbulence, with the world’s two largest economies imposing triple-digit tariffs on each other – before agreeing to a 90-day truce in May. The European Union has also levied anti-subsidy duties on Chinese electric vehicles.
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.


The positive effects were also driven by “intensified competition within domestic markets” as trade restrictions made it harder for companies to find buyers at home, the authors said.
However, while analysts said firms were now cutting investments, they cautioned that other factors might be driving the trend.
Wang Ying, a managing director at Fitch Ratings, said the organisation expects a decline in the average capital expenditure intensity of Chinese companies in the near to medium term, driven by slowing demand growth and reduced investment returns.
“Nevertheless, the risk of capital misallocation may continue in China’s state-dominated system, where state-owned enterprises with lower operating efficiency prevail in domestic bank and debt capital market financing.”
Between 2003 and 2016, the benefits of trade disputes were more pronounced in companies that faced higher penalties, had previously experienced less competition, exported to fewer destinations or had a less diverse product portfolio, the paper found.
However, the effect was weaker for firms with higher agency costs, such as those with greater managerial slack and lower insider ownership.
“These results suggest that while TDIs can discipline managers to reduce overinvestment, their effectiveness is contingent on the pre-existing agency environment within firms,” the authors said.
The world and China are totally different from what they were a decade ago
Wilson Chan Fung-cheung, associate director of MBA programme at City University of Hong Kong
Gary Ng, a senior economist at Natixis, said that it typically made sense for firms to reduce investment when facing reduced cash flows. But he warned that China’s current industrial strategy could offset pressures to cut back.
“It may not necessarily reduce overinvestment and improve efficiency, as zombie firms are not driven out by market forces and are able to survive with subsidies.”
Wilson Chan Fung-cheung, an associate director of the MBA programme at City University of Hong Kong, also cautioned that the study’s conclusions may no longer be relevant given the significant changes in China’s industrial structure and trade environment.
“The world and China are totally different from what they were a decade ago, and it would be problematic to make predictions by relying on such data.”


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New paper argues tariffs curb wasteful investment, but analysts warn findings may not apply to current China–US trade tensions


New paper argues tariffs curb wasteful investment, but analysts warn findings may not apply to current China–US trade tensions.


China’s firms invest more efficiently when facing ‘trade shocks’: researchers

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}New paper argues tariffs curb wasteful investment, but analysts warn findings may not apply to current China–US trade tensions

New paper argues tariffs curb wasteful investment, but analysts warn findings may not apply to current China–US trade tensions