Geopolitical Risk and Decoupling: Evidence from U.S. Export Controls

Authors: Matteo Crosignani | Lina Han | Marco Macchiavelli | André F. Silva

The article examines the effects of U.S. export controls on U.S. and Chinese supply chains amidst the technological competition between the two countries. The U.S. government, through the Bureau of Industry and Security (BIS), restricts American firms from exporting strategic technologies to Chinese companies that pose a threat to U.S. national security. This study aims to analyze the consequences of these controls on U.S. firms and the broader supply chain dynamics.

Key Findings

1. Export Controls and Supply Chain Decoupling

• Export controls result in U.S. firms terminating their business relationships with Chinese firms, including those not directly targeted by the controls.
• Affected U.S. suppliers are hesitant to form new connections with other Chinese firms due to the risk of re-export violations.
• This leads to a significant decoupling of U.S. and Chinese supply chains, with U.S. firms reducing their dependence on Chinese customers.

2. Economic Impact on U.S. Firms

• The implementation of export controls causes a notable drop in the stock prices of affected U.S. firms, resulting in an average loss of 2.5% in market value, amounting to a total loss of $130 billion in market capitalization.
• These firms also experience declines in bank lending, profitability, and employment levels.
• The study finds no evidence that U.S. firms can quickly replace Chinese customers with new ones, either domestically or from other friendly countries (friend-shoring or reshoring).

3. Chinese Strategic Responses

• Chinese firms adapt by establishing new relationships with domestic suppliers and increasing purchases from non-U.S. firms not affected by the export controls.
• This strategic shift helps Chinese firms mitigate the impact of losing access to U.S. technologies.
• Examples include Chinese firms buying more from companies like ASML, a Dutch lithography company, until the Dutch government, under U.S. pressure, imposed similar restrictions.

4. Broader Implications and Considerations

• The costs of export controls to U.S. firms are substantial, raising questions about the overall effectiveness of these measures in achieving their strategic goals.
• While export controls aim to curb the transfer of critical technologies to China, they inadvertently harm the financial health and global competitiveness of U.S. companies.
• The paper suggests that the intended benefits of national security and technological superiority must be carefully weighed against the economic drawbacks faced by U.S. firms.

Conclusion

This is beautiful article that shows the ground reality of the consequences of U.S. export controls. For the simple fact that they are a double-edged sword. For though these controls where aimed at Chinese manufacturers, little did the US policy makers thought about the impact that such a policy would have on the US companies. Take a look at the graph posted at the start of this article. The blue bars are reflective of the impact that the policy has caused to the US companies. To elaborate, these companies have curtailed their trade with their Chinese counterparts, but apparently majority of these companies were not able to find businesses elsewhere. For the simple fact that China has a population that has the purchasing power far greater than any country. If truth be told, there isn't any other country even a distant second to buy US made products as that of China. The policy achieved just one thing, that is, it made China stronger and self reliant, and that it drove most US companies to near extention. This is exactly what the article has showcased in its 59 page report, and we have summed it up for you in brewity. Thus there is need for a more balanced approach that considers both the strategic objectives and the economic consequences of such geopolitical measures.