We construct a text-based indicator of US-China tension and examine its economic transmission. Our index closely tracks the share of related discussions in US firms’ earnings conference calls and that it correlates with firm actions in ways that are highly indicative of firm concerns about bilateral tensions. Elevated US-China tension is associated with protracted declines in US corporate investment, especially among firms
that are expected to be exposed to the bilateral tensions. We also ffnd adverse effects of US-China tension in the aggregate, even after accounting for a large number of factors traditionally used to explain such effects. Impulse responses from medium-sized VARs show that positive shocks to the US-China tension index lead to protracted output declines, increased credit spreads, and reduced bilateral trade. These effects are milder and less persistent in the Chinese aggregates than those of the US. To examine how USChina tension propagates through the real economy, we isolate a component of our index reflecting the realizations of barriers that disrupt bilateral transactions from the component driven by uncertainty of increased barriers without their materialization. We find data patterns suggesting that the economic transmission of US-China tension primarily operates through uncertainty effects.