Wednesday, February 26 @ 1:00-2:00pm CT | Zoom Webinar (canceled)

Title: Geopolitical Shock, Firm Response, and Financial Performance of American Suppliers

Presenter: Dr. Quan Li (Texas A&M University) & Kexin Bai (Texas A&M University)

Discussants: Dr. Clayton Webb (KU) & Dr. Jack Zhang (KU)

Abstract: Do US sanctions make its firms worse off financially? We examine US sanctions against Chinese tech giant Huawei, focusing on their effects on Huawei’s American suppliers. We collect firm-level data to document the responses of the US suppliers, lay out the competing theoretical claims regarding the impact on senders’ firms, and provide a series of empirical estimations of the outcome of interest. More specifically, we analyze data on 112 US suppliers of Huawei and 178 domestic peer firms of those US suppliers from 2015 to 2022. We find that American suppliers adopt heterogeneous responses to the geopolitical shock, including exit, stay, and entry. We then apply a Difference-in-Differences (DID) model to estimate the effect of sanctions on the US suppliers’ profitability measured by their Return on Average Assets (ROAA), based on different response strategies. We find little evidence that compared to peer companies, sanctions reduce the profitability of American suppliers. On the contrary, new entrants outperform peers in financial performance. We further unpack the evidence by estimating each supplier’s local average treatment effect using the synthetic control method. We find rather heterogeneous effects among US suppliers. Our research provides nuanced firm-level evidence on the impact of sanctions on American firms. It challenges the conventional wisdom that the sanction sender’s firms do not gain from geopolitical shocks. Therefore, our research has important implications for the theories of economic sanctions, the design of economic statecraft, and the relevance of geopolitics to trade policies.

The KU Trade War Lab (TWL) supports funded research, offers student research training, and enables campus outreach on the political economy of trade and conflict. To view current projects and upcoming events, please visit: https://sites.google.com/view/jackzhang/twl

Thank you also to our co-sponsors for promoting this event! 
- Department of Political Science
- Center for East Asian Studies (CEAS)

- The Institute for Social Policy and Research (IPSR)