This paper quantifies existing risks to U.S. critical supply chain products using confidential Economic Census data and models the costs to firms of derisking their supply chains as well as explores potential policy implications to blunt those costs.
De-Risking U.S. Supply Chains in the Era of Decoupling
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Growing geopolitical tensions between the U.S. and China have compounded concerns about supply chain resiliency, emphasizing the importance of widening supply chain relationships with other partner nations. Using firm-level import data from the U.S. Census, this study quantifies the sunk costs firms incur when de-risking critical supply chains by transitioning to an alternative supplier country. The study also constructs two policy scenarios of decoupling from China.
Our results indicate that the initial sunk costs companies encounter in their first year of importing restricts their capability to react to trade shocks, and our scenario analysis implies that an unforeseen separation from China might lead to a drop in U.S. companies' operating profits by 15%-50% in critical sectors. However, proactive alterations in trade policy that lower tariffs for countries other than China could compensate for these losses in some sectors.
These findings highlight the need for policies promoting domestic production, supply chain diversification, and stronger trade alliances to reduce dependence on China.