Global Supply Chains and Geopolitical Risks: Policy Implications for Trade Deficits

Abstract

This paper investigates the effects of global supply chain disruptions and geopolitical risks on the U.S. trade deficits defined as the ratio of real imports to real exports. The investigation is achieved by a structural vector autoregression model, where monthly data are used. The empirical results suggest that positive shocks to geopolitical risks reduce total real exports, with no statistically significant effect on total real imports, and thus they increase total trade deficits. When the components of geopolitical risks are investigated, geopolitical acts (rather than geopolitical threats) are found to be effective in this result. Data on end-use categorization further suggest that the positive effects of geopolitical risks on trade deficits are mostly through industrial supplies and capital goods. In contrast, positive shocks to global supply chain disruptions do not have any statistically significant effect on total real exports, total real imports, or total trade deficits, whereas, based on end-use categorization, they have positive and statistically significant effects on trade deficits of foods, feeds, and beverages as well as capital goods. It is implied that policymakers should consider both the type of geopolitical risk and the end-use category to identify the effects of global supply chain disruptions and geopolitical risks on real exports, real imports and thus trade deficits.

Keywords: Supply Chains, Geopolitical Risks, Trade Deficits

JEL Classification: F14, F51, F62