Return-on-Investment Uncertainty, First-Mover Advantages, and Trade Disputes

• In Event: Firms in Trade with China

Abstract

Why do countries sometimes fail to negotiate bilateral settlements to resolve trade conflicts and why is the issue prevalent in high-tech sectors? I argue that the bargaining failures stem from governments' inability to accurately appraise different bilateral settlements and to commit to long-term agreements. Emerging technologies often have high levels of uncertainty about return on investment (ROI), making it difficult to accurately estimate the value of different settlements to trade disputes. Furthermore, the emphasis on first-mover advantages in high-tech sectors makes firms unable to commit to long-term arrangements, reducing governments' incentive to strike any bilateral deals. In the cross-national data analysis between 1995 and 2015, I find that high ROI uncertainty and R&D intensity, which is a proxy for first-mover advantages, will increase the likelihood of punitive tariffs by 59% and 17% respectively. I supplement the large-N analysis with a case study on the information and communication technology (ICT) industry in China. The case study demonstrates that uncertainties highlighted in Congressional Research Service reports about Chinese ICT industries impeded the formulation of mutually acceptable deals between US and Chinese decision-makers. This paper contributes to the studies of trade conflict by highlighting the economic features of high-tech industries and their implications on trade dispute resolution.

Author

• Sichen Li, University of California, San Diego