Spillover effects of US economic policy uncertainty on emerging markets: Evidence from transnational supply chains

Abstract

This study provides empirical evidence on the role of transnational supply chains in the cross-border transmission of US economic policy uncertainty (EPU) to emerging markets. Using data from 22 emerging economies between 2003 and 2022, we find that US EPU significantly increases the risk for firms connected to US supply chains, compared to those operating solely in local markets. The key mechanisms driving this risk transmission are the capital chain (measured by trade credit) and the product chain (reflected in inventory turnover). Cross-sectional analyses show that firms in politically sensitive industries, with constrained financing, and those with higher participation in transnational supply chains experience a more pronounced impact from US EPU. We also observe adverse effects on other aspects of firm performance, including operating income and return on assets. Together these findings highlight the need for emerging markets to actively manage spillover risks arising from US EPU.