Firm Finances and Responses to Trade Liberalization: Evidence from U.S. Tariffs on China

This paper examines the relationship between a firm’s finances and its response to trade liberalization. Using a landmark change in U.S. tariff policy vis-à-vis Chinese imports and micro level data from the U.S. Census Bureau, I find larger manufacturing job losses in better capitalized firms - those with less leverage and more cash on hand. The effects concentrate in industries where weaker balance sheets are likely to lead to collateral and other borrowing constraints, helping rule out alternative explanations. Finally, domestic manufacturing job losses are not accompanied by greater reductions in sales or aggregate employment, but better capitalized firms do exhibit reduced input costs and increased productivity. These findings point to offshoring as the predominant firm response to trade liberalization and suggest a role for financial capacity in facilitating offshoring investments.