Trumps Impact on Chinese Innovation: Evidence from Patents

Recent literature has shown that political tension between countries can affect innovation. After Trump's election and its subsequent impact on Chinese innovation, two contrasting mechanisms have emerged. The knowledge diffusion framework suggests that such tensions adversely impacted Chinese inventors, whereas transaction cost economics proposes that Chinese inventors improved their self-reliance. Utilizing the unexpected "Trump shock" as an opportunity for study, we apply a difference-in-differences model on patent data from the United States Patent and Trademark Office (USPTO) to identify the causal effects of political tension on Chinese innovation. Using similar regions nearby China as the control group, we find that while innovation in most regions was negatively affected by the Trump shock, China performed comparatively better in patent quality, quantity, and search distance following the shock. Results remain consistent across robustness checks. Our research contributes to the understanding of knowledge diffusion and transaction costs, and we highlight the importance of uncovering the unintended effects of politics.