Firm finances and responses to trade liberalization : evidence from U.S. tariffs on China
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This dissertation examines the relationship between a firm's finances and its response to trade liberalization. Understanding how firms with different financial structures react to a major trade liberalization event sheds light both on an important real effect of financial frictions as well as on the underlying mechanisms of reorganization in the U.S. manufacturing sector. In the first chapter, I summarize the nascent yet growing literature at the intersection of corporate finance and trade economics and lay out the contribution of this research. In the second chapter, I provide institutional details on the natural experiment that lies at the heart of my empirical analysis. The conferral of Permanent Normal Trade Relations (PNTR) status to China, effective 2001, reduced uncertainty about future trade costs and facilitated investment in setting up import and distribution networks in China. I discuss the validity of the PNTR shock, arguing that it was an unexpected and material relaxation of trade barriers between the U.S. and China. I also lay out the main hypotheses relating firm finances and responses to freer trade. Increased import competition may represent a threat for many U.S. firms, especially those lacking the financial resources to properly respond. However, the opening of Chinese labor markets and the possibility of offshoring likely represents an important opportunity for firms with the financial wherewithal to invest in overseas production and import networks. While both channels translate to large domestic job losses, the underlying mechanisms and the firms responsible for the losses are very different. In the third and final chapter I use the PNTR shock, along with micro-level data from the U.S. Census Bureau, to empirically assess how firm finances relate to trade responses. 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, increased productivity, and are more likely to invesst in establishing import networks in China. These findings point to offshoring as the predominant firm response to trade liberalization and suggest a role for financial capacity in facilitating offshoring investments.