U.S.-China Tension

We construct a newspaper-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. We document that elevated tension is associated with reduced U.S. corporate investment---especially for firms that are more exposed to China---and reconfiguration of U.S. firm supply chains away from China. U.S.-China tension is also reflected in cross-sectional U.S. stock returns. These effects predate the 2018 trade disputes. We show that transmission channels operate through both tension actions and uncertainty surrounding those actions, with the uncertainty channel being more important.