Supply Chain Risk, Trade and Economic Fragility

We study how equilibrium patterns of production, trade, and input sourcing in complex supply chains are shaped by aggregate risk. We develop a quantitative multi-country model with multi-sourcing across stages. We show that sourcing shares equal an input’s expected output elasticity — its expected marginal contribution to output across states of the world. Risk has a positional effect on sourcing and welfare, operating through offsetting cross-stage complementarity and within-stage substitutability; which one dominates is a quantitative question. An increase in a country’s own risk always lowers its welfare; risk elsewhere has ambiguous, sometimes positive, effects through relative prices. We also show analytically that risk attenuates comparative advantage, as countries shift sourcing away from their most productive suppliers. Quantifying the model for 50 countries and 3 production stages, we show that supply-chain complexity lowers volatility for the riskiest countries, and rising Chinese-origin risk reallocates production and lowers welfare unevenly across the chain.