The Relocation Divide in Global Manufacturing
Why some firms welcome tariffs while others fight them
By Morgan Peters
President Trump’s trade war with China has brought about an uncertain global market. Tariff hikes have firms wondering if they can properly adapt their supply chains, including by relocatingproduction outside of China. Some firms can move production easily and cheaply; others cannot. This means some firms are more exposed to tariffs than others. Given the differing potential costs imposed on multinational corporations, what determines how they view the trade war?
A recent article by Ka Zeng (University of Arkansas), Yingjie Xu (Tsinghua University), and Zhenzhen Xie (Tsinghua University) seeks to answer this question. The authors theorize that the answer lies in csmultinational corporations’ propensity to relocate production. Further, companies’ propensity to relocate is determined by their external embeddedness; that is, their level of involvement with suppliers, customers, and stakeholders in China. Firms that can easily shift production to other countries are more likely to relocate. These firms are more likely to support the trade war becausethey can adapt their supply chains to avoid tariffs. Conversely, firms that have stronger connections to the Chinese market face substantially higher costs to relocate production. Therefore, they are unlikely to support the trade war.
The authors began with two hypotheses: firms that have either relocated or are considering relocating production from China should be less likely to oppose the trade war, and firms more heavily embedded in local supplier networks should be less likely to relocate or consider relocating production. They test their hypotheses using data from an online survey of China-based multinational corporation subsidiaries in the manufacturing industry. Accepted survey responses were from mid- and upper-level managers of these subsidiaries. Data was collected from 31 of the 32 provinces and municipalities in China. Most firms were headquartered in the United States (131), Japan (124), the European Union (109), and Hong Kong (31). The survey gathered the degree of firm support for the trade war, firms’ propensity toward manufacturing relocation, and variables that may affect the propensity toward relocation.
The data shows that the majority of firms oppose the trade war – 320, or 70.02%. Only 80 (17.51%) of the firms expressed support, and 57 (12.47%) of the firms were ambivalent. These attitudes correlate with the firms’ propensity towards relocation of production. In line with the authors’ first prediction, as relocation ability increases, the probability that a company “strongly opposes” the trade war decreases (0.461 to 0.247). The inverse is also true; as relocation ability of a company increases, the probability of supporting the trade war increases (0.116 to 0.272). Their second theory is also supported by the data. They analyzed the relationships between three variables: embeddedness, relocation, and trade war support. The results show that firms that engage in more local sourcing, supplier certification, and exports to China are less likely to consider relocation. In turn, lower propensity to relocate reduces support for the trade war.
Multinational companies are likely to be hurt by tariffs, but not all to the same extent. Subsidiaries that are more deeply embedded in China are less likely to be able to relocate, which reduces support for the trade war. Meanwhile, companies that can move outside of China are more supportive. These results demonstrate how the trade war impacts companies differently, highlighting how its effect on the economy can be difficult to predict and manage.