Yuqi
Peng

Trade uncertainty and conflicts increase the risks of sourcing from affected countries, yet firms continue to form new relationships with some suppliers in these markets. We take a supplier perspective and examine what enables these suppliers to remain viable sourcing partners despite these risks. Using global firm–supplier relationship data from FactSet, we employ a difference-in-differences (DiD) design that leverages the 2018 trade conflicts between the U.S. and several of its major trading partners, in which U.S.-initiated tariffs were followed by retaliatory tariffs, resulting in bilateral trade conflicts. We find a significant selection penalty for suppliers located in countries involved in the conflicts. Importantly, the effects extend beyond these geographic targets: trade shocks spill over through supply chain networks, reducing the likelihood of selecting suppliers connected to affected suppliers and countries. This finding suggests that geographic diversification alone may be insufficient for supply chain diversification when trade risks propagate through interconnected supply chains. We further show that supply chain embeddedness helps explain why some suppliers in affected countries remain selected: suppliers with stronger access and alternative channels to their customers’ countries experience a smaller decline in selection, as do suppliers with more localized and deeply established supply bases in their home countries, despite the conventional expectation that suppliers more deeply rooted in countries involved in trade conflicts would be more adversely affected. These findings show that suppliers embedded in supply chain networks are not only exposed to risks from trade conflicts but can also benefit from market access, production support, and supply chain coordination that help them withstand these risks and continue to participate in global supply chains.

Keywords: New supplier selection, trade conflicts, supply chain embeddedness, network spillover, causal inference