Trade War, Core Input, and Firm Value

Title: Trade War, Core Input, and Firm Value

Abstract: We study the asset pricing implications of firms’ participation in the global supply chain. Higher input tariffs decrease firm value through higher input costs. The negative effects of input tariffs are more substantial for firms importing a lot of core inputs with low substitutability. We test the theoretical predictions in the context of the US-China trade war and quantify the impact of trade protectionism on Chinese firm value. One standard deviation increase of input tariff on core inputs reduces the daily stock return by 0.12 percent for firms importing core inputs, while input tariffs on non-core inputs barely have any adverse effects due to input substitution. The welfare loss of the Chinese retaliatory tariffs was as much as $5.50 billion, 0.81% of the total value added of Chinese listed firms.