Abstract
Using the 2018 US-China trade war as a quasi-natural experiment, we investigate how downstream shrinkage affects upstream employment. Utilizing a difference-in-differences (DID) approach, we reveal a negative effect of downstream shrinkage on upstream firm employment. Our mechanism analysis indicates that trade wars increase the tax burden, inventories, and accounts payable for downstream firms while reducing their employment. This shrinkage of downstream firms limits the scale of investment and operations for upstream firms through supply chain transmission, thereby decreasing employment of upstream firms. Moreover, our finding is more pronounced for specific types of firms, such as non-state-owned firms, firms operating across multiple industries. Our study provides an essential reference for firms in building resilient supply chain networks to better cope with potential negative shocks.
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