Rising rivalry between the U.S. and China is reshaping corporate decisions on sourcing, production, and investment.
In an era of intensifying geopolitical rivalry, the global economy is being reshaped by tensions between the United States and China. For U.S. firms, this raises a pressing question: How should they adjust their supply chains to navigate the future?
According to a paper published in the Journal of International Business Studies, U.S. firms are responding to government pressure to decouple from China, but not at a uniform pace, reflecting a tradeoff between political legitimacy and efficiency.
Jinyuan (Stephanie) Song, assistant professor of management at Costello College of Business at George Mason University, co-authored the paper with Bo Yang of The University of Hong Kong and Yifan Wei and Jing Li of Simon Fraser University.
Their research hinges on the concept of geopolitical risk, which is defined as disruptions driven by state actions seeking advantages over rival countries. Traditionally, firms optimized supply chains for efficiency and prioritization of low costs. But geopolitical tensions introduce new kinds of risks, such as regulatory scrutiny, loss of government financing, and research access.
Song says, “Our goal is to understand how these companies actually respond to this geopolitical pressure and whether these responses vary across industries.”
To examine these questions, the researchers conducted an in-depth study of U.S.-based firms. They used a large-scale data-set that tracked the firm and supplier relationships from 2009 to 2022, including the key turning point of 2017, the start of the first Trump administration. Firms vital to national security were identified as belonging to strategic industries, signifying that these firms encountered a heightened level of geopolitical risks relative to firms in other industries. This methodology was designed to capture observable shifts in global operations.
The findings reveal that before 2017, firms in both strategic and non-strategic industries had a similar number of Chinese suppliers. However, after 2017, firms in strategic industries had 29 percent fewer Chinese suppliers, suggesting their greater caution under geopolitical pressures. This pattern was initially only observed among Republican-leaning firms during the 2017-2020 Trump administration. But by 2021 and 2022, this pattern was reflected across firms of all political leanings, due to the Biden administration’s continuance of many of its predecessor’s priorities.
Additionally, the authors find that firms with low economic dependence on China are more likely to align with their government’s preferences, while those with high dependence face efficiency constraints.
“There are two types of dependence. One is market revenue, which means how big a proportion of the revenue depends on the customers in China. The second type has to do with the options available: whether suppliers outside China have the capacity to do what the firm requires,” Song clarifies.
As a result, Song further explains, “business leaders have to balance their costs and benefits, such as R&D support from their home government. At the same time, they have to sacrifice their efficiency in their current relationships with the foreign market, therefore having to balance this legitimacy and efficiency,” Song explains.
The implications extend to policymakers as well. “They need to move away from really black and white narratives, such as decoupling or not.” Corporate responses to regulations can reshape industries. “It is more nuanced. Policymakers need to be sensitive to economic realities and the national interest,” Song says.
Therefore, for firms, the researchers point to the growing importance of what is described as a “China + 1” strategy, where operations in China are retained while diversifying elsewhere—giving China-dependent firms more time and flexibility to accomplish the shift.
“This means keeping some operations in China while building parallel capacities in other countries. So this is really about rebalancing, seeking greater supply chain resilience, and about risk management,” Song adds.
Looking forward, the researchers aim to continue exploring how firms combine investment strategies at home while preserving economic interests in rival countries. Given the ever-fast-evolving political and economic environment, it will be insightful to examine how firms will adjust their global supply chain.
The message is clear: efficiency is no longer enough. Resilience and adaptability are now more than ever essential to supply chain design. Song concludes, “Firms need to tailor their interventions. That’s to balance those ends for economic reality and the national interest.”