Supply Shocks in Supply Chains: Evidence from the Early Lockdown in China

Abstract

How do firms in global value chains react to input shortages? We examine micro-level adjustments to supply chain shocks, building on the COVID-19 pandemic as a case study. French firms sourcing inputs from China just before the early lockdown in the country experienced a drop in imports between February and April 2020 that is 7% larger than firms sourcing their inputs from elsewhere. This shock on input purchases transmits to the rest of the supply chain through exposed firms' domestic and export sales. Between February and April, firms exposed to the Chinese early lockdown experienced a 5.7% drop in domestic sales and a 5% drop in exports, in relative terms. The drop in foreign sales is entirely attributable to a lower volume of exports driven by a reduction in the number of markets served. We then evaluate whether mitigation strategies adopted by some exposed firms helped them weather the shock. Whereas the ex-ante geographic diversification of inputs does not seem to mitigate the impact of the shock, firms with relatively high inventories have been able to absorb the supply shock better.

Keywords: Diversification, global value chains, inventories

JEL Classification: F14, F23