U.S.-China tension and its impact on the financial sustainability of US companies

Haijie Xu

 Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Ahmed Alam
 

Abstract:

China is one of the largest trading partners of the United States. According to a report published by the U.S. News, which was based on data from the U.S. Census Bureau, China accounted for more than 10% of total U.S. international trade as of September 2024. Therefore, political and policy-specific tensions between the U.S. and China are likely to hamper their trading relationship, leading to greater financial fragility of businesses on both sides. In this paper, utilizing the U.S.-China tension index developed by Rogers, Sun, and Sun (2024), we empirically investigate whether and how escalated tension between the U.S. and China affects the financial well-being of American companies. Employing multivariate regression models, we show that an upward shock to the U.S.-China tension index reduces the overall financial stability of U.S. firms. This impact is observed in all industries except Chemical and Allied Products and exhibits greater economic magnitude for larger firms and firms with higher corporate leverage. Additional tests show that the increased tension reduces U.S. firms' capital investment, return on assets, and return on equity. Our findings call for the development of specific policies at the firm level to ensure sustained financial performance of American companies in times of escalated geopolitical tensions.