Sourcing Under Pressure: Geoeconomic Risk, Firm Dependence, and the US-China Trade Conflict

In an increasingly fractured global economy, hegemonic tensions between the United States and China have become a formidable challenge for multinational businesses, particularly those dependent on these rival superpowers. This study explores the impact of firm-level geoeconomic risk exposure on supply chain strategies. Using the ongoing US-China hegemonic conflict as a focal point, this research leverages Hegemonic Stability Theory and Resource Dependence Theory to illuminate how firms exposed to geoeconomic risk respond to an increasingly volatile environment.

Through a panel analysis of 100 US manufacturing firms from 2019 to 2023, I measure geoeconomic risk exposure by combining firm shipment records and tariff policy data. The findings show strong evidence that firms respond to geoeconomic risk by decreasing their dependence on shipments from their hegemonic rival country. The findings also show compelling evidence that industrial policies from a hegemonic rival may counteract the government’s attempts to pressure its firms into reducing dependence on its rival, and that a firm’s supply chain diversification may help facilitate firms reduce sourcing dependence on China.

I argue that while Hegemonic Stability Theory and Resource Dependence Theory provide valuable frameworks for understanding the dynamics of hegemonic conflict between the US and China, neither theory sufficiently explains the complexities firms face. With its focus on a lone political hegemon, Hegemonic Stability Theory falls short of addressing the nuances of a world where multiple forms of hegemony exist. On the other hand, Resource Dependence Theory does not fully capture the geoeconomic pressures that arise when a firm is caught between a political hegemon and a manufacturing hegemon. Together, these theories reveal an unprecedented situation where a country can artificially reduce the location-specific advantages of a rival nation by implementing coercive geoeconomic policies. These policies compel firms to choose between aligning their global sourcing strategies with their home nation’s geostrategic ambitions and continuing to source from a central global manufacturing location. This research makes pivotal contributions to International Business Literature. It introduces firm-level geoeconomic risk as a distinct and critical concept and empirically tests its implications on firm sourcing strategies. By utilising insight from Hegemonic Stability Theory with Resource Dependence Theory, this research addresses core criticisms of these theories by highlighting China’s role as a manufacturing hegemon. In addition, this research contributes important managerial implications, underscoring the decisions firms must make between the short-term costs of decoupling and the long-term benefits of reduced geoeconomic risk exposure. Last, it contributes to policymakers by emphasising the potential unintended consequences of its geoeconomic policies and proposing strategies for nations targeted by geoeconomic policies to counteract such measures through their industrial policies.