7th October 2022 – (Hong Kong) Geopolitical tensions and US-China trade conflicts have sparked concerns within the market about the impact on companies in China and the United States, according to “Impact of the U.S.–China Trade War on the Operating Performance of U.S. Firms: The Role of Outsourcing and Supply Base Complexity,” a joint academic report by The Hong Kong Polytechnic University, Monash University and University of California, Los Angeles. The report stated that US firm with Chinese procurements were negatively affected by the US-China trade war with adverse effects including higher inventory (days of supply) and lower profitability (Return On Assets) when considering American firms with direct suppliers in China that has consequently negatively affected the competitiveness of American firms.

The research study considered US firms’ operational performance data before and after the implementation of the new tariffs. From 2019 to 2021, the US trade deficit with other countries increased even as the deficit with China was reduced, according to the research. Essentially, rather than moving production back to the United States, American,  firms shifted production to countries with lower labor costs such as Vietnam and Mexico. Dr. Di Fan, Assistant Professor, School of Fashion and Textiles at The Hong Kong Polytechnic University, who leads this study says, “It suggests that applying tariffs to a single country hardly stimulate the reshoring of domestic manufacturing sectors in the global supply chain era. Since the supply chain of influential multinational companies relies significantly on global trade, since trade barriers would severely impact these firms’ operations and, eventually, the domestic economy and boost the inflation.”

A report from Moody’s revealed that US importers absorbed 90% of the additional costs resulting from the tariff levies. The argument is echoed by a survey of over 200,000 firms wherein 40% of U.S. firms reported that the trade war increased their operating costs. Yi Zhou, Lecturer, Monash University who participates in this research and says, “The findings of this research align with the survey, if the treatment firms held more inventory, they would bear additional inventory holding, goods-in-transit and transportation costs which negatively affected their overall cost efficiency. ”

In conclusion, protectionism had lost its power to protect the domestic economy. The research also considered Tesla (NASTAQ: TSLA) as an example. The company filed lawsuits against the U.S. government over its tax imposed on Chinese products demonstrating that applying tariffs to a single country cannot stimulate the reshoring of domestic manufacturing sectors. Instead, it undermined the operations and profits of these firms. The research suggested that the US government may find it more effective to focus on facilitating firms’ relocation rather than imposing tariffs.

It was suggested that “outsourcing” and “diversifying the supply base” will help mitigate the risks that come with geopolitical tensions and trade wars. However, these initiatives required extra effort, according to the research. Companies would need to manage their materials and coordinate among suppliers; suppliers might also take advantage of a buyer’s urgent need and increase product prices aggressively. Dr. Di Fan says, “the increasing transaction costs offset the advantages that come with improved flexibility. Therefore, firms with greater outsourcing and supply base complexity were likely to suffer more with an increase in days of supply and lower profitability.”

The research is published in Journal of Operating Management. The other collaborators include Professor Andy C.L. Yeung and Dr Chris Lo from The Hong Kong Polytechnic University and Professor Christopher S. Tang from University of California, Los Angeles.