Session 15: China in the Global Economy

This study analyzes the supply chains, technological independence and domestic value added (DVA) of the Chinese EV industry by tearing down two popular models: the BYD Seal and the Tesla Model 3. It is the first study to use teardown data for two representative EV models to estimate the distribution of the value added in China EVs and the tasks performed by the makers’suppliers. We find that 92% of BYD’s suppliers are in China and 65% of them are Chinese domestic firms, which produced 82% of the parts and components embedded in the BYD Seal. The localization of Tesla Shanghai’s supply chains is even higher, with more than 96% of Tesla Shanghai'ssuppliers in China, and 62 local Chinese firms participating in the supply chains to produce almost half of the parts and components in Model 3. 90% of the BYD Seal’s retail price is DVA generated in China, while only 45% of the total value of the Model 3 manufactured at the Shanghai factory is attributed to China. The extensive particpation of Chinese firms in BYD and Tesla supply chains implies that the Chinese EV industry has achieved technological independence in the sector. However, foreign firms remain dominant in the supply of semiconductor chips: 97% of the chips used in the Model 3 are either imported or manufactured by wholly foreign owned ventures, while more than 50% of the semiconductor chips used in the BYD Seal are procured from foreign suppliers.

We develop a new method to measure the importance of a patent for subsequent innovation, based on the use of a Large Language Model to process patent text data and a new model of the innovation process. We apply this method to study the evolution of patenting in China from 1985-2019, also classifying patent ownership using a comprehensive business registry. Our analysis yields seven novel facts about Chinese patenting. Among these are that patenting has become narrower and less innovative over time; that knowledge within China has become more important than knowledge outside of China for directing innovative activity in China; and that knowledge produced by Chinese entities within China has been more important than knowledge produced by foreign entities filing patents in China.

We study the success of the traditional national security policy practice of targeting companies in preventing the flow of innovations, focusing on U.S. efforts regarding China. To examine these questions, we use a newly assembled, comprehensive database of Chinese patent publications. The data suggests a sharp increase in both the quantity and quality of Chinese innovation in technologies designated as critical by the U.S. Department of Defense. We assess the potential impact of U.S. policy efforts to restrict China’s access to American innovation. While U.S. government efforts to select firms working on critical technologies through the Entity List appear well targeted, the impact on the firms’ subsequent innovation seems minimal. We suggest that inventor mobility from U.S. to Chinese firms may be an important mechanism for knowledge flows and identify the U.S. institutions most associated with these flows. Finally, we also explore how patent data can be used to more precisely identify critical technologies and the firms advancing them with an eye to impeding technology transfers.

Electric vehicle (EV) battery costs have declined by more than 90% over the past decade. This study investigates the role of learning-by-doing (LBD) in driving this reduction and its interaction with two major government policies – consumer EV subsidies and local content re- quirements. Leveraging rich data on EV models and battery suppliers, we develop and estimate a structural model of the global EV industry that incorporates heterogeneous consumer choices and strategic pricing behaviors of EV producers and battery suppliers. The model allows us to recover battery costs for each EV model and quantify the extent of LBD in battery production. The learning rate is estimated to be 9.2% during our sample period after controlling for indus- try technological progress, economies of scale, input costs, and EV assembly experience. LBD magnifies the effectiveness of consumer EV subsidies and drives cross-country spillovers from these subsidies. Upstream battery suppliers capture only a minor share of LBD’s economic benefits, and consumer EV subsidies correct for the under-provision of learning and improve social welfare. China’s local content requirement helps domestic suppliers gain a competitive advantage at the cost of consumers and foreign suppliers, but would have harmed domestic welfare if delayed by five years.

Within the context of the U.S.-China trade conflict, U.S. mutual fund investment in Chinese companies has been subject to stricter national security scrutiny; however, little is known about how these funds vote in Chinese companies. This study provides the first empirical analysis of U.S. mutual fund proxy voting in Chinese companies. It finds that BlackRock lends strong support to Chinese Communist Party (CCP)-initiated governance reforms that strengthen the CCP’s control over Chinese companies—reforms that Vanguard and State Street largely oppose in line with major proxy advisors’ recommendations. Analyzing 24,556 fund-firm voting instances from January 2018 to June 2022, this study shows that proxy advisor recommendations are the strongest determinant of fund votes, with funds more likely to support in-house CCP committees in state-owned and large firms.

BlackRock’s voting pattern raises pressing questions about its stewardship responsibilities to U.S. beneficial owners. A prior event study reveals that the adoption of CCP-related charter provisions reduced firm value, suggesting BlackRock prioritized political allegiance to the CCP over shareholder interests. The timing of these supportive votes coincided with BlackRock’s pursuit and eventual acquisition of the first wholly foreign-owned asset management license in China, echoing concerns about distorted incentives familiar from the U.S. context. By instrumentalizing proxy voting as a tool of political signaling, BlackRock diverged from peer funds and major proxy advisors. Situating these dynamics within broader geopolitical tensions, this paper advances understanding of the governance role of global asset managers and highlights important normative questions about asset manager stewardship amid an increasingly politicized corporate environment.

With highly disaggregated transaction level Russian trade data, we find that while EU and US trade sanctions significantly reduced Russian trade with the West, they are ineffective in reducing its trade with non-Western countries and even induce trade diversion to countries such as China and India. In comparison, financial sanctions - a removal of Russian banks from the SWIFT system and a withdrawal of Western banks from Russia - significantly reduced Russian trade with both Western and non-Western countries. The effects of financial sanctions are more prominent on the extensive margin, causing fewer Russian firms able to trade. However, the effects on Russian trade with non-Western countries are undermined by financial bypassing-specifically, the increased use of non-Western currencies (and potentially banks), particularly the Chinese Renminbi, in such trade.

This paper investigates the global welfare implications of firm-based industrial policies. We develop a two-country general equilibrium model incorporating firm-level distortions in domestic and export markets to characterize conditions under which industrial subsidies in one country adversely impact welfare in another. Using detailed firm-level data from China, we calibrate the model to empirically examine China’s industrial policies and their global welfare implications. Our analysis demonstrates that subsidizing exporters can, under certain conditions, decrease global welfare by exacerbating resource misallocation. Counterfactual simulations reveal substantial heterogeneity in welfare effects across industries, highlighting that subsidizing exporting firms in one-third of Chinese industries may reduce welfare for the rest of the world.

We decode China’s industrial policies from 2000 to 2022 by employing large language models (LLMs) to extract and analyze rich information from a comprehensive dataset of 3 million documents issued by central, provincial, and municipal governments. Through careful prompt engineering, multistage extraction and refinement, and rigorous verification, LLMs allow us to classify the industrial policy documents and extract structured information on policy objectives, targeted industries, policy tones (supportive or regulatory/suppressive), policy tools, implementation mechanisms, and intergovernmental relationships, etc. Combining these newly constructed industrial policy data with micro-level firm data, we document a set of facts about China’s industrial policy that explore the following questions: What are the economic and political foundations of the targeted industries? What policy tools are deployed? How do policy tools vary across different levels of government and regions, as well as over the development phases of an industry? What are the impacts of these policies on firm behavior, including entry, production, and productivity growth? In addition, we explore the political economy of industrial policy, focusing on top-down transmission mechanisms, policy persistence, and policy diffusion across regions. Finally, we document spatial inefficiencies and industrywide overcapacity as potential downsides of industrial policies.

The past two decades have witnessed remarkable progress in China’s electric vehicles (EVs). This paper first documents the dynamic evolution in China’s EV industrial policies in both EV R&D grants and EV purchase subsidies. We then develop a two-country-two-technology industry equilibrium model with directed and step-by-step innovation to formally theorize the impact of polices in a global context. In the model, the initial technology gap in EVs is much smaller than the counterpart in gasoline vehicles (GVs) between Home (China) and Foreign, which, together with environmental consideration, incentivize both government and private producers in Home to switch lanes to EVs to leapfrog. Optimal policies feature front-loaded EV R&D subsidies and hump-shaped EV purchase subsidies. Purchase subsidy rate is initially low as it would accrue profits to foreign producers when domestic EV technology lags behind, and eventually phases out when the EV relative price is sufficiently low. We further examine the interaction between subsidies and trade policies.

We develop a general principal-agent model with multiple agents and multiple tasks to address the incentive challenges faced by China’s party-state authorities across different phases of development over recent decades. Our theory shows that when the party-state shifts its strategy from a single, growth-focused target to multiple targets, the high-powered incentives generated by regional tournament-style competition break down. In such a setting, local authorities prioritize tasks that are more easily comparable, resulting in an allocation of effort that is increasingly beyond the central authority’s control. Our empirical analysis, based on a linked employer-employee approach, supports these theoretical predictions—revealing significant declines in growth-oriented efforts after 2012, particularly in environmentally challenged provinces. These findings offer insight into China’s evolving economic trajectory and the rise of new social challenges.

Recent studies on the U.S.-China trade dispute indicate that U.S. importers fully absorbed the increases in U.S. import tariffs. However, using firm-level data from the U.S. Census, we find incomplete tariff pass-through for firms continuing to import the same product from the same country. Large importers experience higher pass-through and account for a greater share of import. Firms that import new products or source from different countries pay higher prices than those maintaining existing relationships. Thus, prior findings of complete pass-through reflect import reallocation toward firms with higher pass-through or costlier new supplier relationships. We explain these patterns using an importer model with firm-specific import prices and sourcing strategies. We find that fixed import costs, larger importers’ higher import prices, elastic foreign export supply, and larger importers’ higher bargaining power collectively account for the findings. We also revisit the welfare implications of tariffs under firm heterogeneity.

This paper examines how internal migration and trade openness shape spatial and aggregate economic growth through knowledge diffusion. Using data from China’s rapid growth period, we provide causal evidence that regions attracting migrants, especially from more productive regions, and those more exposed to international trade, experience faster knowledge accumulation. We develop a dynamic spatial model in which idea flows, mediated by trade and migration, drive forward-looking factor accumulation (labor and capital) and endogenous productivity growth. Our quantitative analysis highlights the significant impact of initial spatial conditions on China’s long-term growth path and reveals that factor accumulation and idea diffusion vary in importance across different phases of its transition. Furthermore, our quantitative analysis highlights the crucial role of idea diffusion in explaining spatial growth heterogeneity.

How do firms embedded in global supply chains (GSC) respond to geopolitical tensions? Existing research propose competing expectations about the impact of the emergent changes on firms’ GSC reshuffling strategies and corresponding adjustments. We examine the question through a conjoint experiment with a sample of senior managers of over 1,000 manufacturing firms in China, focusing particularly on small and medium-sized enterprises (SMEs). Chinese SMEs are an under-explored set of players heavily involved in global supply chains. Meanwhile, they also face increased headwinds caused by geopolitical tensions, prompting many to consider relocating their businesses to third countries. We analyze the locational preferences of the respondents, and find that firms are significantly more likely to move their operations to countries with pro-China foreign policy stances than to countries that are pro-U.S. or independent. They are also more likely to relocate their operations to countries with free trade agreements with China and to countries within the belt and road initiative. More importantly, the political and diplomatic considerations of firm managers seem to trump economic and commercial ones. Compared with extant findings on Western multinational firms, Chinese SMEs are less concerned with intellectual property protection and labor costs. Notably, host country’s tax incentives only appeal tp firms when they do not have strict constraints attached. Further analysis shows different patterns between Chinese SMES highly embedded in GSCs and those that are not. The overall evidence suggests that Chinese SMEs are embracing existing global economic governance frameworks and institutions while pursing nationalistic interests with significant political sensitivity.

US multinationals form joint ventures in China for market access and lower labor costs. However, these ventures transfer knowledge to Chinese partners and local firms, increasing future competition from China. While multinationals take into account these spillovers, they don’t account for the impact on other US firms, potentially leading to over-investment from a US social perspective. We establish three novel empirical facts on spillovers and competition effects. First, Chinese parent firms of joint ventures become larger, export more, and grow technologically similar to their US partners. Second, in industries with more joint ventures, even non-participating Chinese firms grow larger and more technologically advanced. Third, US firms in these industries experience negative impacts on their size, exports, and innovation. We then develop a two-country growth model with oligopolistic competition and endogenous innovation and joint venture decisions. For the US, joint ventures generate short-run gains that are outweighed by long-run losses due to rising competition from China. Large US firms’ profits are higher with joint ventures, at the expense of small firms’ profits and the real wage. Banning joint ventures from the beginning would have raised US welfare by 1.3 percent but reduced China’s by 10 percent, as Chinese firms’ productivity growth is substantially delayed.

China’s unprecedented expansion of higher education, launched in 1999, increased annual college enrollment from 1 million to over 9.6 million by 2020. This paper traces the global ripple effects of that expansion by examining its impact on US graduate education. Combining administrative data from China’s college admissions system and the US SEVIS database, we leverage the centralized quota system in Chinese college recruitment for identification. We find that China’s college expansion explains roughly 27% of the increase in Chinese graduate student enrollment in the US between 2003 and 2015. We then document downstream consequences for US universities: Chinese master students generate positive spillovers, driving the birth of new STEM master's programs, and increasing the number of other international and American master's students. Our findings highlight how domestic education policy in one country can reshape the academic and economic landscape of another.