Geopolitical Risk and Supply Chain Reshoring

Abstract

Leveraging a news-based measure of geopolitical risk (GPR) and cross-border customersupplier relationship data, we investigate how U.S. manufacturers adjust their supply chains in response to GPR fluctuations. As anticipated, we find that escalating GPR prompts manufacturers to reduce their reliance on foreign suppliers. However, the overall size of manufacturers' supplier bases remains unaffected, suggesting that reshoring is a strategic adjustment aimed at maintaining operational robustness. Intriguingly, the impact of GPR on reshoring is asymmetric; decreases in GPR do not lead to increased foreign engagements, indicating a "stickiness" in the reshoring process. Confirming the established understanding of the direct benefits of reshoring, we show that reshoring is more prevalent among firms with substantial domestic sales and extensive outsourcing. Interestingly, we also uncover a risk-mitigation channel; firms with a broader or more geographically dispersed customer base experience less pressure to reshore during periods of heightened GPR, suggesting that downstream diversification can act as a mitigation strategy. Moreover, the reshoring trend is significantly stronger among firms headquartered in Democratic-leaning states. Granular analysis shows that terminating relationships with foreign suppliers is more likely when their specific country's GPR rises. Finally, the operational flexibility achieved through reshoring enhances firm performance during such periods, demonstrating the strategic importance of adaptable supplier network management in mitigating the impacts of GPR.

Keywords: Geopolitical risk, supply chain, reshoring, customer diversification