Trade Networks and Firm Value: Evidence from the US-China Trade War

This paper evaluates the financial implications of policy shocks for global production networks. We use the announcements of tariff increases on a wide range of goods by the US and Chinese governments in 2018-2019 as events, starting with the presidential memorandum issued by the Trump administration on March 22, 2018, to study the impact of trade policy shocks on firms’ stock market performance. Using various novel datasets, we document significantly heterogeneous responses by firms to the announcements. We also show that these responses are determined by the degree to which firms are directly and indirectly exposed to US-China trade through the global value chains. In particular, US firms that are more dependent on exports to and imports from China have lower stock returns and higher default risk around the announcement dates, whereas the reduced import competition from China has a limited effect on the firms. We also find consistent patterns of stock market reactions by Chinese firms. Two reverse experiments in 2019 further validate how the complex structure of global trade shapes stock market reactions to policy shocks.