Trade and Foreign Economic Policy Uncertainty in Supply Chain Networks: Who Comes Home?

Abstract

The uncertainty around trade and foreign economic policy contributes to supply chain risk. Whether such policy uncertainty will bring some production back to the U.S. or only a redistribution of the global supply chains is theoretically ambiguous and warrants an empirical analysis. We study the impact of trade and foreign economic policy uncertainty on the supply chain networks of American firms. We use firm-level global supply chain data, transaction-level shipping container data, and policy uncertainty indexes constructed from leading media outlets to study how policy uncertainty is associated with changes in supply chain networks. When U.S. trade policy uncertainty rises, firms with majority domestic sales decrease their supplier base abroad, while firms with majority foreign sales increase the number of foreign suppliers. Firms also substitute among foreign countries in response to their respective economic policy uncertainty – shifting suppliers from countries with higher uncertainty to ones with lower uncertainty. Firms that require more specific inputs, produce more differentiated products, have higher market shares, and are more central in the production network are more sensitive to policy uncertainty. Supply chain restructuring following higher policy uncertainty puts the market value at risk. Managers should consider their customers’ locations when making global supply chain restructuring decisions.

Keywords: policy uncertainty, supply chain restructuring, reshoring, supplier diversification

JEL Classification: F10, F13, G12, G14, O24