The China Trade Shock and the ESG Performances of US firms

TL;DR

This paper investigates how increased Chinese import competition influences US firms' ESG performance, finding that trade shocks lead to more environmental initiatives and product differentiation efforts, independent of production changes.

Contribution

It provides empirical evidence that Chinese trade shocks positively impact US firms' ESG engagement, emphasizing product differentiation over production offshoring as the main mechanism.

Findings

Greater Chinese import competition increases US firms' ESG performance.

The improvement mainly involves environmental initiatives and positive actions.

The change is driven by product differentiation, not production offshoring.

Abstract

How does import competition from China affect engagement on ESG initiatives by US corporates? On the one hand, reduced profitability due to import competition and lagging ESG performance of Chinese exporters can disincentivize US firms to put more resources to ESG initiatives. On the other hand, the shift from labor-intensive production to capital/technology-intensive production along with offshoring may improve the US company's ESG performance. Moreover, US companies have incentives to actively pursue more ESG engagement to differentiate from Chinese imports. Exploiting a trade policy in which US congress granted China the Permanent Normal Trade Relations and the resulting change in expected tariff rates on Chinese imports, we find that greater import competition from China leads to an increase in the US company's ESG performance. The improvement primarily stems from "doing more positives" and from more involvement on environmental initiatives. Indirect and direct evidence shows that the improvement is not driven by the change in production process or offshoring, but is consistent with product differentiation. Our results suggest that the trade shock from China has significant impact on the US company's ESG performance.