Session 10: China in the Global Economy

Do industrial policies that promote clean energy offer a “ray of hope”, increasing a country’s growth and welfare, whilst simultaneously reducing carbon emissions? We study the impact of Chinese solar subsidies whose implementation by city-regions went alongside massive expansion of the sector and a dramatic fall in global solar prices. We construct new city and firm panel data on solar policies, patenting and output. Using synthetic-difference-in-differences 2004-2020, we find production and innovation subsidies were more effective than demand-side (installation) subsidies in generating large and persistent increases in local innovation, net entry, production and exports. Demand policies did, however, reduce local pollution. To examine aggregate effects, we build and structurally estimate a quantitative spatial model with endogenous innovation and heterogeneous productivity across firms and cities, which accounts for business stealing and knowledge spillovers. Counterfactual analysis shows that: (i) local effects remain substantial at the macro level explaining 40%-50% of the aggregate changes in solar innovation, prices and revenues; (ii) social benefits to Chinese citizens exceed subsidy costs by 65% (and double this when environmental benefits are included); and (iii) although all subsidy types increase welfare, innovation subsidies are the most cost-effective.

This paper examines how supply chain structure contributed to the rise of China’s electric vehicle (EV) industry. Combining the universe of buyer–seller matched transactions in upstream auto parts production with detailed downstream vehicle sales data, we document two defining features of China’s auto supply chain: market thickness and geographic co-location. China’s supplier base is exceptionally dense and spatially clustered around major automotive hubs, and supplier–assembler distances are substantially shorter than in North America across many component categories. These features matter economically: thicker upstream markets reduce input prices through stronger competition, better supplier selection, and improved matching, while proximity between suppliers and assemblers raises matching probability, increases transaction volume, and improves product quality, especially for more customized parts. To quantify these mechanisms, we develop and estimate a structural model that combines a bargaining model between upstream part suppliers and downstream automakers with differentiated-product Bertrand competition downstream. The model links supplier competition, input prices, and input quality to downstream vehicle pricing and demand. Counterfactual simulations imply that if China had the upstream supply chain structure of the United States, EV parts prices would rise by about 62 percent, vehicle prices would increase by roughly 50 percent, and EV sales would fall by about 57 percent. Overall, differences in supply chain structure can explain roughly half of the U.S.–China EV price gap. The results highlight how dense supplier networks and vertical agglomeration can generate major competitive advantages in emerging manufacturing industries.

Generative AI is fast becoming the first place people turn for expert advice. The advice it provides can be directional rather than neutral, shaped in part by the choices of its designers and regulators. When clients consult AI before meeting an expert, they carry this directional advice into a relationship that once rested on the expert's judgment alone. We study its consequences in healthcare through a large-scale preregistered field experiment at a Chinese hospital, where we randomize patients' access to an AI chatbot before their outpatient visit. Examination of the conversation logs shows that the chatbot routinely cautions against the use of medications, especially Traditional Chinese Medicine and antibiotics, while issuing clean recommendations for diagnostic testing, consistent with the liability-driven guardrails encoded in AI training. This directionality propagates into clinical practice. Prescription rates decline among treated patients while diagnostic testing increases, and these effects are more pronounced among physicians who are receptive to patient input and those with more intensive prescribing styles. Beyond shifting healthcare utilization, survey results show that AI access reduces patient compliance and satisfaction, shifting the balance of authority between patients and physicians.

This paper examines China’s transition from pharmaceutical “free rider” to global innovator over the last decade. In 2010, China accounted for less than 8% of global clinical trials; by 2020, it had surpassed the US in annual registered clinical trial volume. To study this transformation, we compile a comprehensive, synchronized database spanning the pharmaceutical drug development supply chain, covering scientific publications, clinical trials, drug development milestones for China, the U.S., and Europe, alongside drug sales and government policies over the same period. We provide strong evidence that China’s rise was primarily driven by the National Reimbursement Drug List (NRDL) reform, which dramatically expanded the effective market size for innovative drugs. We document a sharp rise in both the quantity (86% increase) and novelty of drug trials post reform, with growth concentrated in reform-exposed disease categories, first- or best-in-class drugs, and among domestic firms. A decomposition exercise reveals that the NRDL reform accounts for 43% of the growth in oncology trial activity, nearly doubling the combined contribution of upstream knowledge accumulation and talent flows (24%), while other government policies play a minor role. Finally, dynamic gains from induced innovation exceed the reform’s static gains in consumer access to innovative drugs by threefold, underscoring the importance of accounting for the reform’s long-run effects on innovation incentives in addition to near-term improvements in drug affordability.

This paper proposes and investigates the role of bank risk management channel in how central bank local currency swap lines facilitate the international use of local currencies in trade invoicing. We exploit disaggregated data at the Korean exporter-trading partner-year level on currency invoicing during 2006-2019. We find that the signing of swap lines between Korea and China has likely contributed to a rise of the RMB in invoicing shares among Korean exporters, crowding out US dollars. Conversely, the expiration of a swap line between Korea and Japan has likely led to a decline in the Japanese yen (JPY) invoicing share. Importantly, Korean banks raised interest rates on RMB deposits but lowered them on JPY deposits. Furthermore, those Korean exporting firms whose main banks had more ex-ante exposure to China exhibit a greater increase in RMB invoicing. We rationalize this in a model in which the swap line on a foreign currency improves banks’ risk management with respect to that currency, which incentivizes them to offer higher deposit interest rates on that currency, leading to its greater use in trade invoicing.

Using cross-border holding data from all custodians in China’s Stock Connect, we provide evidence that Chinese mainland insiders tend to evade the see-through surveillance by round-tripping via the Stock Connect program. Following the 2018 Northbound Investor Identification reform, the return predictability of northbound flows decays, as does the correlation between these flows and insider trading. This reduction is especially pronounced among less prestigious foreign custodians and cross- operating mainland custodians, behind which mainland insiders are more likely to hide. Furthermore, the reform erodes price informativeness, particularly in stocks with high exposure to homemade foreign investors. Our analysis sheds light on the role of regulatory cooperation over capital market integration.

We provide novel empirical evidence that semiconductor innovation drives downstream innovation. We then develop a new two-country endogenous growth model in which semiconductor firms make strategic investments and downstream firms rely on semiconductors as critical innovation inputs, establishing semiconductor innovation as the primary engine of long-run economic growth. We estimate the model to evaluate the impact of U.S. semiconductor export controls on innovation and productivity. Our analysis yields three key findings. First, U.S. export controls generate a short-run innovation boom in the U.S. semiconductor and downstream sectors, driven by a stronger escape-competition motive and an increased domestic supply of semiconductors. However, in the long run, U.S. growth slows across both sectors, even if the U.S. successfully widens its technological lead. Second, a positive downstream innovation shock, such as advancements in AI, magnifies the short-run benefits and mitigates the long-run costs of these export controls. Third, if the U.S. had a much larger semiconductor technological advantage before the export controls, the short-run innovation boom would disappear due to a much weaker escape-competition motive among semiconductor producers. Because the U.S. semiconductor technological advantage over China has been decreasing in recent decades, this provides one explanation for why the U.S. is imposing export controls now rather than earlier.

This paper studies the long-run effects of high-skill return migration on scientific productivity and institutional development, using evidence from US-trained Chinese scientists during the Great Return Wave of the 1950s. Exploiting quasi-random variation in return opportunities generated by Cold War–era US exit restrictions, we compare the careers and research trajectories of scholars who returned to the People’s Republic of China with those who remained in the United States. Combining newly digitized historical archives with multilingual bibliometric data, we trace individual scientific output, research agendas, and institutional spillovers over several decades. We show that return migration had persistent effects on domestic knowledge formation, field development, and intergenerational talent formation, highlighting the central role of human capital and know-how transfers in early-stage nation building.

Invoice-credit VAT is neutral only with full refunds, yet most developing economies deny them. We provide what is, to our knowledge, the first firm-level structural estimate of this distortion’s shadow cost. Using China’s 2018–2019 VAT rate reforms and a shift-share design, we find non-refundability generates a liquidity wedge of 220–340% per year—large enough to account for a substantial portion of aggregate capital misallocation. We uncover a behavioral puzzle: when input rates fall, trapped credits do not. Because production complementarities dominate tax incentives, firms instead increase formal input sourcing, meaning statutory rate reform alone cannot close the gap. Out-of-sample validation identifies output formality as the escape margin; firms unable to raise it remain structurally trapped and require targeted fiscal intervention. The optimal refund mechanism ranks firms by a single observable—the input tax burden. China’s 2025 reform entirely reversed this priority ordering.

We use panel survey data to document that the effects of mainland Chinese economic growth on Taiwanese support for full political and economic integration are heterogeneous depending on education. For Taiwanese with higher educational attainment, mainland growth increases their support for reunification. For those with lower education, growth reduces their support for reunification and increases their support for official independence. We find similar results for income and the probability of visiting and conducting business in the mainland. These results suggest that broad-based economic growth under the threat of coercion builds support for autocratic regimes. We are currently conducting an online survey experiment to provide additional evidence on these channels and to measure preferences and beliefs about cross-strait outcomes, including the expected duration of the status quo, democratic rights under reunification, the likelihood of armed conflict, and the extent of U.S. support in the event of independence.