The Impact of Tariff Trade Barriers on the Operating Performance of U.S. Firms : The Role of Supply Structure and Complexity

Multinational corporations (MNCs) have benefited tremendously from free trade in the past few decades in the form of cost reductions, resource advantages, and market expansion. However, the dynamism of international relations and a global recession have rekindled the debate over frictionless trade. In this study, we examine how trade friction, created by tariff trade barriers, affects the operational performance of domestic firms. We also investigate how different supply chain characteristics and strategies can moderate the impact of such trade friction. Motivated by the 2018 U.S.-China trade war, we conducted a difference-in-difference analysis to examine the impact of trade tariffs on various firm performance indicators of U.S. firms. We find that U.S. firms with direct supply chain partners (i.e., first-tier suppliers) in China have worse performance in terms of inventory (days of supply) and profitability (ROA). We further show that the negative impact on firms’ profitability is more severe when firms have a lower degree of vertical integration and when firms have a higher degree of horizonal, spatial, and cooperative supply base complexity. We discuss the implications for international operations management, supply chain networks, and supply risk management, and provide suggestions to supply chain practitioners and trade policy makers