The impact of trade policy on global supply chain network equilibrium: A new perspective of product-market chain competition

Abstract

In the context of globalization, cross-border transactions are growing. Trade policies essentially strike the global supply chain networks. They not only change product flows but may also disrupt some chains. To reveal how trade policies, including tariffs, quotas, and subsidies, affect the global supply chain equilibrium, this study first decomposes the supply chain network into several product-market chains (PM chains) according to the product flows and the directed market. Second, to characterize the inter-chain competition under the Cournot-Nash competition, we establish an optimization model for each PM chain and provide the equilibrium conditions by using variational inequality theory. Third, we propose the qualitative properties of the equilibrium and solve the model using the Euler algorithm. Finally, to analyze the influence of different trade policies imposed at different stages, we conduct several numerical examples based on a network that is close to reality. We figure out the threshold when one chain is disrupted by the trade policy. PM chain disruption reconstructs the network and generates a new equilibrium. It explains the appearance of inflection points when analyzing the policies’ effects. Here we summarize the major impacts of trade policies before network reconstruction. All three trade policies imposed on the supply side increase the competitive advantage of domestic raw material suppliers, but they hurt domestic final product producers in the studied network. On the other hand, these trade policies imposed on the demand side benefit the domestic final product producer while hurting the foreign final product producer. The effects of tariff/quota and subsidy imposed on the demand side have the opposite effects on raw material suppliers: the tariff/quota decreases while the subsidy increases the output of the raw material suppliers. We consider three extensions with the adjusted network structures and partially substitutable products to demonstrate the wide applicability of the proposed approach. This work contributes to the literature by providing a framework of modeling to investigate inter-chain competition in a global supply network in the presence of trade policies.