Hedging Along the Global Value Chain: Trade War and Firm Value

We study the asset pricing implications of firms’ participation in the global supply chain. A firm’s global sourcing strategy serves as an option to hedge its value against trade shocks. Higher output tariffs increase firm value through reduced import competition, whereas higher input tariffs decrease firm value through higher input costs. The negative effects of input tariffs are more substantial for firms more reliant on foreign suppliers. We test the theoretical predictions in the context of the US-China trade war and quantify the impact of trade protectionism on Chinese firm value. One standard deviation increase of input tariff reduces the daily stock return by 0.12 percent for firms importing inputs, more than offsetting the gains from raising output tariffs by one standard deviation. The negative effect of input tariffs is larger for firms with high import intensity and low import substitutability. The welfare loss of the Chinese retaliatory tariffs was as much as $5.50 billion, 0.81% of the total value added of Chinese listed firms.