Not Coming Home: Trade and Economic Policy Uncertainty in American Supply Chain Networks
41 Pages Posted: 3 Apr 2020 Last revised: 16 Apr 2020
Date Written: February 7, 2020
We study the impact of trade and economic policy uncertainty on supply chain networks of publicly-listed American firms. Beyond the actual trade and other economic policy, the uncertainty around these policies contributes to supply chain risk. Whether such policy uncertainty will bring production back to the U.S. or only a redistribution of the global supply chains is theoretically ambiguous and warrants an empirical analysis. Using firm-level global supply chain data and policy uncertainty indexes, we investigate the question using reduced-form empirical specification with high dimensional fixed effects. Rather than inducing production to come “home,” on average higher U.S. trade policy uncertainty predicts an increase in foreign and decrease in domestic supplier relationships, driven by firms with majority foreign customers. In contrast, those with mostly domestic customers decrease foreign supplier relationships. American firms also appear to substitute among foreign countries in response to foreign-country-specific economic policy uncertainty – shifting suppliers from countries with higher uncertainty to ones with lower uncertainty. Firms with less production flexibility and more bargaining power respond more to all measures of economic policy uncertainty. Our results suggest firms take precautionary action consistent with a trade-off between lowering production cost versus avoiding risk related to trade and economic policy uncertainty.
Keywords: economic policy uncertainty, trade war, supply chain restructing, supplier diversification
JEL Classification: F10, F13, G12, G14, O24
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