Finding Friendly Trade Partners amidst Decoupling from China

• In Event: Geopolitical Risks and Supply Chain Challenges

Abstract

The US-China trade war – and broader changes in China’s economy, politics, and foreign relations with the West – have created sharp increases in costs and risk for firms dependent on China. Under what conditions are firms willing and able to decouple from China? We argue that decoupling is only possible where viable alternative markets for sourcing and production are abundant. Geopolitically-aligned markets are particularly appealing amidst rising global tensions. We test this theory looking at product-level imports, and show that declines in US imports from China were much larger for products previously sourced from many markets. Requests for suspensions of trade war tariffs were also much more common for US firms that lacked alternative import options. Both of these effects are driven by sourcing from allied and friendly alternative markets. Our results suggest that effective decoupling is highly variable across industries and depends on both political and economic factors.

Authors

• Ayse Eldes, Princeton University

• Jieun Lee, University at Buffalo, SUNY

• Iain Osgood, University of Michigan, Ann Arbor