Supply Chain Risk and the Pattern of Trade

Abstract

We analyze the interaction of supply chain risk and trade patterns. Our model yields a novel determinant of comparative advantage. In the model, countries with low supply chain risk specialize in risk-sensitive goods. We also show that risk-sensitivity is determined by the number of customized components used in production. Based on our theory, we construct a novel empirical measure of risk-sensitivity from input-output tables and measures of customization (Rauch, 1999). Using industry-level trade data and a variety of risk proxies, we show that countries with low supply chain risk indeed export risk-sensitive goods disproportionately. The model has policy implications: Countries that strive to attract a risk-sensitive industry such as car manufacturing can do so by improving supply chain reliability