Impact of the U.S.-China Trade War on the Operating Performance of U.S. Firms: The Role of Oursourcing and Supply Base Complexity

Multinational corporations have benefited tremendously from free trade in the past few decades in the form of cost reductions, resource advantages, and market expansion. However, the dynamism of international relations, paired with the global recession, has rekindled the debate over frictionless trade. In this study, we examine how trade friction, created by tariff trade barriers, affects the operational performance of domestic firms. We also investigate how various supply chain characteristics and strategies can moderate the impact of such trade friction.
Motivated by the 2018 U.S.-China trade war, we conducted a difference-in-difference analysis to examine the impact of trade tariffs on various performance indicators of U.S. firms. We found that U.S. firms with direct supply partners (i.e., first-tier suppliers) in China had a worse performance in terms of inventory (i.e., days of supply) and profitability (return-on-assets). We further found that the negative impact on firms’ profitability was more severe for firms with a higher degree of outsourcing, and horizontal and spatial supply base complexity. We discuss the implications for international operations management, supply chain networks, and supply risk management, and provide suggestions to supply chain practitioners and trade policymakers.