Regulatory Trade Risk and Supply Chain Strategy

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Abstract

Trade regulations are an important driver of supply chain strategy in many industries. For example, the textile, paper, chemical, and steel industries grapple with significant levels of non-tariff barriers (NTBs) such as safeguard controls and countervailing duties. We explore three often observed supply chain strategies in industries subject to NTBs; direct procurement, split procurement, and outward processing arrangements (OPAs). We characterize the optimal procurement quantities for each of these three strategies, and examine how industry and country characteristics influence the firm's strategy preference. For example, we establish that the direct and split strategy profits increase in the NTB price variance but decrease in the mean price. These effects are sufficiently large that NTB price characteristics can dictate which supply chain strategy is preferred. Both the cost disadvantage and lead-time advantage of domestic production are also significant influencers of the preferred strategy, as is the domestic-country mandated production constraint associated with the OPA strategy.

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