Geopolitics, Supply Chains, and Firms’ Demand for Economic Security Policies: Evidence from Japanese manufacturing firms

Rising geopolitical tensions have led governments to restrict trade and investment under economic security justifications. While these restrictions are costly for firms, opposition to protectionism is not universal among them. Why? We demonstrate a demand-side mechanism in which geopolitical tensions increase global firms’ demand for government restrictions to coordinate and facilitate collective adjustment of supply chains. We predict that firms facing higher supply chain coordination costs are more likely to support restrictive economic security policies and test this prediction using an original survey of Japanese manufacturing firms merged with confidential microdata documenting supply chains. The results suggest that firms with deeper integration into global supply chains are more likely to support government restrictions, especially among firms with overseas contract manufacturing and a high number of affiliates in China. Global firms may demand government intervention due to the social costs of supply chain adjustments.