Trade Policy Uncertainty and the Structure of Supply Chains

We model the impact of changes in trade policy uncertainty on supply chains and show that a reduction in the probability of a trade war can foster the adoption of “Japanese”-style procurement practices, in which domestic buyers ensure the provision of high-quality inputs from foreign suppliers via long-term, just-in-time relationships. Empirically, we first show that the model provides a useful framework for analyzing shipments between U.S. importers and foreign exporters, and then demonstrate that a change in U.S. trade policy that eliminated the possibility of substantial increases in U.S. tariffs on Chinese goods coincides with a shift towards “Japanese” procurement. Our estimated general equilibrium model shows that the shift led to substantial U.S. welfare gains.