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

Abstract

We study the impact of trade and other economic policy uncertainty on supply chain networks of American firms. The uncertainty around the trade and other economic policy 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, transaction-level shipping container 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 supplier relationships, driven by firms with majority foreign sales. In contrast, those with mostly domestic sales mildly 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 more bargaining power respond more to all measures of economic policy uncertainty. Corporate managers should take their customers’ locations into account when making sourcing decisions; in particular, reducing operational risk due to changing economic policies may involve additional offshoring rather than re-shoring.