  How does import competition from China affect engagement on ESG initiatives
by US corporates? On the one hand, reduced profitability due to import
competition and lagging ESG performance of Chinese exporters can disincentivize
US firms to put more resources to ESG initiatives. On the other hand, the shift
from labor-intensive production to capital/technology-intensive production
along with offshoring may improve the US company's ESG performance. Moreover,
US companies have incentives to actively pursue more ESG engagement to
differentiate from Chinese imports. Exploiting a trade policy in which US
congress granted China the Permanent Normal Trade Relations and the resulting
change in expected tariff rates on Chinese imports, we find that greater import
competition from China leads to an increase in the US company's ESG
performance. The improvement primarily stems from "doing more positives" and
from more involvement on environmental initiatives. Indirect and direct
evidence shows that the improvement is not driven by the change in production
process or offshoring, but is consistent with product differentiation. Our
results suggest that the trade shock from China has significant impact on the
US company's ESG performance.
