U.S.-China trade frictions and supply chain reconstruction: Perspective from indirect links

• The U.S.-China trade frictions are considered key junctures in the global supply chain reconstruction. Existing literature predominantly emphasizes the decline in direct supply chain relations between the U.S. and China. However, the comprehension of the indirect supply chain relations through third countries involving these two nations remains limited. This paper aims to fill this gap. • Based on the theoretical discussions, this paper utilizes data of U.S. listed firms from 2014 to 2022 to empirically investigate the impact of trade frictions on the indirect supply chain relations between the U.S. and China, employing a difference-in-differences model. • We find that U.S. firms are inclined to cooperate with third-country firms that are deeply integrated into Chinese supply chain after 2018. Furthermore, we further point out that U.S. firms maintain indirect supply chain relations with Chinese firms through third countries due to procedural costs, financial costs, and relational costs. • We show that Chinese firms increase their supply chain connections with third countries and increase green-field investment in these countries. Additionally, U.S. allies also adjust their supply chains in a similar manner to the U.S., while non-U.S. allies do not make any adjustments. Building on the theoretical discussions, the paper empirically investigates how U.S.-China trade frictions impact the supply chain through the perspective of indirect links. It utilizes data of U.S. listed firms from 2014 to 2022 and employs a difference-in-differences model for analysis. The baseline estimation finds that U.S. firms tend to establish supply chain relations with third country firms deeply integrated into Chinese supply chain after 2018. Mechanism analysis shows that after trade frictions occur, U.S. firms choose to maintain indirect supply chain connections with China through third countries based on considerations of procedural costs, financial costs, and relational costs. Heterogeneity analysis indicates that U.S. firms in industries directly affected by trade frictions or in industries where China has supply chain advantages are inclined to make such adjustments, tending to engage in indirect cooperation with Chinese firms through third-country firms that have pre-existing supply chain collaborations with Chinese firms. Extended analysis examines the supply chain adjustments of other countries or regions after the trade frictions. We find that Chinese firms increase their supply chain connections with third countries and increase green-field investment in these countries. U.S. allies also adjust their supply chains like the U.S., while non-U.S. allies do not make any adjustments. Hence, the paper believes that the “decoupling” strategy may be difficult to achieve, and trade restrictions only lead to U.S. firms maintaining indirect relations with China through third countries.