Import Policy Uncertainty and Innovation

• Published date: 01 January 2024
• Author: Lingshan Chen,Yunong Li,Qian Xie,Mao Zhou
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/cwe.12520

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 197–230, Vol. 32, No. 1, 2024

197

Import Policy Uncertainty and Innovation

Lingshan Chen, Yunong Li, Qian Xie, Mao Zhou*

Abstract

The Chinese government has emphasized innovation as the primary driving force

for economic development in the new era. This paper studies the effect of import

policy uncertainty (IPU) on the innovation activity of Chinese manufacturing firms. It

establishes a simple model to show that the presence of IPU encourages innovation and

that a reduction in IPU discourages innovation. It distinguishes the almost unnoticed

IPU reduction from tariff reduction on China’s WTO accession and develops a novel

difference-in-differences specification that identifies the negative effect of IPU reduction

on innovation using updated data for Chinese manufacturing and patent filings. The

result holds after a battery of identification assumptions and robustness checks are

considered. The import channel explains about two thirds of the effect of IPU on

innovation, but not all of the effect. Finally, this paper examines the effect across firms

of different levels of productivity and ownership types and patents of different categories.

Keywords: import policy uncertainty, innovation, patent, WTO

JEL codes: F13, F14, O31

I. Introduction

Innovation is an important driving force for economic development. Since its reform

and opening up, China has consistently attached great importance to innovation.

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give increasing attention to the strategic supporting role of innovation. In his report

to the 19th National Congress of the Communist Party, Chinese President Xi Jinping

emphasized that innovation is the first driving force of development. The Fifth Plenary

Session of the 19th Central Committee of the Communist Party of China also put

*Lingshan Chen, PhD, School of International Business, Southwestern University of Finance and Economics

(SWUFE), China. Email: lingshanc@163.com; Yunong Li, Professor, School of International Business,

SWUFE, China. Email: myunongli@gmail.com; Qian Xie (corresponding author), Associate Professor,

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Professor, School of International Business, SWUFE, China. Email: zhoumao@swufe.edu.cn. The authors

acknowledge the contributions to this paper by Mengkai Yang, Hongyan Jia, and Yumeng Yang from SWUFE.

This research was supported financially by the National Natural Science Foundation of China (Nos. 72173132,

72173100, and 72003193) and SWUFE Jiaozi Institute of Fintech Innovation (No. cgzh20210202).

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

[Correction added on 4 November 2025, after first online publication: The copyright line was changed.]

Lingshan Chen et al. / 197–230, Vol. 32, No. 1, 2024

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

198

forward the development strategy of “three news and one high,” i.e., based on the

new development stage, a new development concept will be implemented, a new

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be promoted.

Meanwhile, there has been a rise in protectionism in recent years; the world

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Pacific Partnership, the renegotiation of North American Free Trade Agreement, i.e.,

United States–Mexico–Canada Agreement, and the launching of a trade conflict by

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international trade and international relations were disrupted, and trade policy

uncertainty (TPU) increased further. As China is the main target of protectionist trade

policies, it must retaliate with its own countermeasures, often related to its imports,

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(TPU), especially import policy uncertainty (IPU), affect the innovation activities of

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This study, drawing on and extending the idea of a gap between actual tariffs

and historically high tariffs as a measure of IPU in Handley et al. (2020), exploits the

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accession and develops a novel difference-in-differences (DID) estimation framework to

investigate the effect of IPU on the innovation of manufacturing firms in China. Since

joining the WTO in December 2001, China has not only been committed to cutting its

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tariff and not to reverse the tariff levels to those that existed before its opening up. The

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to increase its import tariff and not to return to the previous high tariff levels reduces

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utilized the gap between actual import tariffs and historically high tariffs as a measure

of IPU for intermediate input. This paper, on the other hand, focuses on IPU at industry

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reliable for causal identification.

This work is related to the growing body of literature on trade policy uncertainty

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WTO accession is of particularly importance and is of interest to researchers. Before

the accession in 2001, most-favored nation (MFN) tariffs were applied to Chinese

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annual review by the US Congress. If the NTR status was revoked, Chinese exports

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Import Policy Uncertainty and Innovation 199

would face much higher Smoot–Hawley tariffs or an average tariff hike of more than

30 percent. The permanent normal trade relations (PNTR) status granted by the US

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US tariffs imposed on Chinese exports, and thus the trade policy uncertainty (TPU)

faced by Chinese exports was reduced significantly. Several studies have examined the

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migration in China, the investment and innovation of US firms, the US labor market,

the US political elections, and so forth (Pierce and Schott, 2016; Feng et al., 2017;

Handley and Limão, 2017). As there is no arrangement for imports comparable to

NTR status and the annual congressional review of trade relations in China, it is more

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related to PNTR relate to the export policy uncertainty (EPU) faced by China but

there are few studies on IPU for China. The more recent works by Imbruno (2019) and

Handley et al. (2020) are important exceptions. Imbruno (2019), using tariff binding

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the reduction in IPU, whereas Handley et al. (2020) used the gap between actual tariffs

and historically high tariffs and studied the effect of IPU on the firm-level intermediate

input import. Other studies in this literature examined the uncertainty reduction due

to trade agreements as well as recent episodes such as the rise of protectionism under

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Steinberg, 2019; Benguria et al., 2022).

This work is also related to the literature that investigates how trade liberalization

affects innovation by Chinese firms. Previous studies have shown that import tariff

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Liu and Qiu (2016) found that intermediate input tariff reduction significantly decreased

the innovation activity of Chinese firms. Liu et al. (2021) found that import competition

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evidence was found by Bombardini et al. (2017) and Brandt et al. (2017), which showed

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and Ma (2020) found that firms in sectors with a larger reduction in uncertainty filed

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found that TPU was positively associated with more research and development (R&D)

and patents.

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IPU, which has been studied less, and its effects on the innovation activity of Chinese

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is properly cited.