Not Coming Home: Trade and Economic Policy Uncertainty in American Supply Chain Networks
47 Pages Posted:
Date Written: February 7, 2020
We study the effect of American trade policy uncertainty (U.S. TPU), American non-trade economic policy uncertainty (U.S. EPU), and foreign economic policy uncertainty (foreign EPU) on the supply chain network of American public firms. As a motivating example, we find firms with more domestic suppliers increase foreign supplier relationships even before the onset of the China-U.S. trade war in March 2018, beginning around the time of President Trump’s campaign announcement. In reduced-form analyses, we find higher U.S. TPU predicts trade creation – rather than bringing production “home”, American firms’ supplier and customer bases tilt abroad when U.S. TPU increases. The tilt is also associated with lower long-term strategic investments and asset growth. Meanwhile, foreign-country EPU shocks lead to trade diversion to other foreign countries. Firms for which production shocks would be more severe and those more central to the production network respond more to all measures of economic policy uncertainty.
Keywords: supply chain networks, economic policy uncertainty, supplier diversification, trade war
JEL Classification: F10, F13, G12, G14, O24
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