Weathering the storm along the global supply chain: Evidence from China

Abstract

With global climate change accelerating, extreme weather has become one of the most salient external shocks to the stability of global value chains. We incorporate FactSet Revere supply chain data with EM-DAT disaster data and construct a firm–location–year panel based on the overseas supply chain relationships of Chinese A-share listed firms over 2010–2023, and then examine the association between extreme weather and the disruption and construction of firms’ overseas supply chain relationships at supplier/customer locations. We find that extreme weather occurring at partner location is significantly positively associated with the disruption of firms’ supply chain relationships with local trading partners. This finding remains robust after further controlling for region-by-year fixed effects and applying propensity score matching and entropy balancing to mitigate potential omitted-variable and sample-selection biases. Heterogeneity analyses reveal that the positive association between extreme weather and supply chain disruption is concentrated among overseas customer relationships and is more pronounced for firms with higher supply chain concentration and for non-state-owned firms. Across disaster types, the positive association is stronger for floods and extreme temperatures than for droughts. Our analysis of buffering effects suggest that the positive association is weaker for firms with higher ex ante net trade credit financing and greater internal financial buffers. Further analysis indicates that extreme weather is not only significantly positively associated with the disruption of existing supply chain relationships but also with the construction of new relationships in affected locations. Such relationship construction primarily reflects the introduction of new trading partners rather than the restoration of previously disrupted relationships.