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Do Targeted Trade Sanctions Against Chinese Technology Companies Affect US Firms? Evidence from an Event Study

Published online by Cambridge University Press:  02 March 2021

Jeffrey S. Allen*
Affiliation:
Johns Hopkins University, School of Advanced International Studies, 1740 Massachusetts Avenue NW, Washington, DC, 20036, United States
*
Corresponding author: Jeffrey S. Allen, email: jallen71@jhu.edu

Abstract

This article asks how costly targeted trade sanctions imposed by the US government are for domestic firms. I argue that, as a result of sanctions, the firm value of US companies that have supply relationships with sanctioned entities is likely to suffer from lost revenue, reputational damage, and business model uncertainty. I test this expectation by applying an event study to the important case of targeted trade sanctions against Chinese technology companies. I find that sanctions against these companies reduced their US suppliers’ risk-adjusted stock returns by 220 basis points. Firm-level cross-sectional analysis shows that businesses with stronger ties to the sanctioned entities are more negatively affected, which supports the direct connection between sanctions and relevant suppliers. Measuring the domestic economic ramifications of sanctions for the sender country has been elusive. These findings, which are statistically and economically significant, indicate that US companies face notable costs from sanctions against internationally active firms.

Type
Research Article
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of V.K. Aggarwal

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