Overview

We quantify tension between the U.S. and China and examine its economic transmission. We present a text-based index of U.S.-China tension (UCT) that shows close alignment with the views expressed by business and policy decision makers, both in rhetoric and action.  Our U.S.-China Tension index rises notably around the Belgrade embassy bombing in 1999, spy plane standoff in 2001, Tibet unrest and China military buildup in 2008, the arrest of a Huawei executive in 2018, sustained trade disputes in 2018-2019, mutual blaming over the spread of coronavirus, and war in Ukraine. 

Using our UCT index, we document that elevated tension is associated with a retrenchment of U.S. corporate investment, an effect significantly more pronounced among firms likely impacted by tensions. Additionally, we find that increased tension correlates with reconfiguration of U.S. firm supply chains away from China and is reflected in cross-sectional stock return patterns consistent with investor expectations of deteriorating economic opportunities.  Consistently, we find negative transmission of rising tensions in the aggregate data.  These effects predate the 2018 trade disputes. 

Decomposing our index into a component reflecting concrete actions that directly impede bilateral engagement and a component driven by uncertainty surrounding the trajectory of such frictions, we find that transmission operates primarily through the uncertainty channel, though both are important.  Our findings reveal nuanced implications of continued tension: should uncertainty surrounding the relationship subside, even a high-tension, new norm could see contained economic effects.  

Description 

Our approach to constructing the baseline UCT index is to track the share of newspaper articles related to U.S.-China tension. Using the ProQuest Newsstand and historical archives, we construct the index by searching for keywords related to U.S.-China tension in major newspapers. Following the dictionary approach pioneered by Baker, Bloom and Davis (2016), we search for articles containing mention of (i) United States (or U.S.) and China (or Chinese), (ii) contentious issues in the bilateral relationship,  and (iii) phrases indicating tension. To determine the search terms, we utilize topic modeling algorithms, including K-means, guided LDA, and Newsmap analysis, to identify likely relevant words in a large number of manually identified articles that discuss U.S.-China tensions. We execute the search for every day's issue of the following newspapers: Boston Globe, Chicago Tribune, Los Angeles Times, New York Times, USA Today, Wall Street Journal, and Washington Post. 

We assess the information value of our index by employing distinct, independent approaches to measure bilateral tensions, discovering substantial common variability between them. Our analysis reveals that our UCT index  closely aligns with the concerns that business and policy decision makers articulate through rhetorical statements, policy actions, and real economic decisions related to the bilateral relationship.  For business decision makers, we find that fluctuations in the share of discussions dedicated to U.S.-China tensions during corporate earnings calls parallel movements in our UCT index. This result indicates that our index aligns with firm communications about the impacts on their operations and outlook, which is also in line with a robust negative response of firm investment to rising UCT. To evaluate policymakers' stance, we analyze related U.S. policy actions on both the domestic and international fronts. We begin by documenting that the intensity of related discussion in U.S. presidential State of the Union addresses exhibits concurrent movements with our UCT index. We also find that the fraction of congressional legislations categorized as "anti-China" mimics the movements of our newspaper-based UCT index over time. Furthermore, our index moves in tandem with disagreements between the U.S. and China at the United Nations.  

Data

The monthly UCT index can be found here, 

It can be cited as John H. Rogers, Bo Sun, and Tony Sun 2024,  “U.S.-China Tension,” Working paper.

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