Not Coming Home: Trade and Economic Policy Uncertainty in American Supply Chain Networks

41 Pages Posted: 3 Apr 2020 Last revised: 16 Apr 2020

See all articles by Ben Charoenwong

Ben Charoenwong

National University of Singapore - Department of Finance

Miaozhe Han

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: February 7, 2020

Abstract

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

Suggested Citation

Charoenwong, Ben and Han, Miaozhe and Wu, Jing, Not Coming Home: Trade and Economic Policy Uncertainty in American Supply Chain Networks (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3533827 or http://dx.doi.org/10.2139/ssrn.3533827

Ben Charoenwong

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/519-ben

Miaozhe Han

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

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