Propagation of Overseas Economic Shocks through Global Supply Chains: Firm-level Evidence

Abstract

Recently, global supply chains are often disrupted because of trade policies and natural disasters. This study simulates the effect of disruption of imports from and exports to various regions on the total production of Japanese firms, incorporating propagation of the economic effect through domestic supply chains at the firm level. We find that the negative effect of disruption of intermediate imports grows exponentially as its duration and level increase because of downstream propagation. In particular, disruption of imports of electrical parts and components from Asia including China largely affects the manufacturing production of Japanese firms. In addition, the negative effect of disruption of imports from a specific region is more closely related to how importers are linked with other domestic firms than the import value from the region. Furthermore, the negative effect of import disruption can be largely mitigated by reorganization of domestic supply chains, even if the newly connected suppliers are limited to suppliers of competitors, i.e., firms sharing a supplier with the focal firm. Our findings suggest that when trade restrictions are imposed, the economic losses can vary substantially depending on their target industries, duration, and level, and the available substitutions.

Keywords: Global supply chains; trade disruption; simulation