Firm Contracting and Trade Costs

• In Event: New Approaches to the Political and Economic Consequences of Trade Exposure

Abstract

What explains differences in economic resilience to trade competition across industries and countries? We argue that resilience depends on domestic political institutions and the cost of supply chain disruptions: production networks with higher costs to disruption are more resilient to trade competition, as firms are reluctant to jeopardize their production network by substituting an existing supplier for a foreign firm. We expect these effects to be larger in coordinated market economies, where firms rely more on informal contracting and establishing new relationships is more difficult. We further expect the resilience of firms to affect the policy preferences of their employees. To test the argument, we first leverage a new product-level dataset from 2000-2021. We find that products characterized by relationship-specific production are less sensitive to trade competition in coordinated market economies. We then relate these patterns to political preferences using survey data: individuals employed in more relationship-specific sectors are 1) more supportive of globalization, 2) more likely to support incumbents, and 3) less likely to turn to populist parties. Our research highlights the role of institutions in structuring the embeddedness of firms in domestic production networks and the resilience of different networks to trade shocks. It opens up a new perspective on how the “Varieties of Capitalism” can explain empirical patterns across developed economies.

Authors

• Timm Betz, Washington University in St. Louis

• Søren Frank Etzerodt

• Amy Pond, Washington University in St. Louis