Trade policy uncertainty and supply chain disruptions: Firm-level evidence from “Liberation Day”

The US announcement on 2 April 2025 of “Liberation Day” tariffs created an unexpected, precisely timed, and country-specific episode of trade policy uncertainty. This column uses transaction-level data to show that US firms rapidly shifted sourcing from high-risk to low-risk countries even before the tariffs were fully implemented. This pre-emptive reallocation came at the cost of higher import prices, and was driven by firms with inventory-intensive and contract-dependent supply chains and firms with greater reliance on trade finance. The findings demonstrate that even brief periods of trade policy uncertainty can significantly disrupt supply chains.

“Strategic uncertainty is a negotiating tactic,” stated US Treasury Secretary Scott Bessent in 2025.The logic was clear: if trading partners face uncertain outcomes, they may be more pliable in negotiations. However, for US importers, uncertainty is not a tactic — it is a cost.

On 2 April 2025, President Donald Trump announced the ‘Liberation Day’ tariffs, threatening additional tariffs ranging from 10% to 50% on nearly all countries. While a baseline 10% tariff was implemented on 5 April, the portions above 10% were postponed to allow for bilateral negotiations. This created a country-specific episode of trade policy uncertainty (TPU) lasting from April to July 2025.

In a recent paper (De Souza et al. 2025), we exploit this episode to examine how firms adjust their global sourcing in response to the threat of tariffs. We find that firms did not wait for the negotiation outcomes. Instead, they rapidly reallocated supply chains away from high-TPU countries toward those facing the baseline 10% tariff (‘10% countries’). Such pre-emptive reallocation raised import prices and was mostly driven by firms with contract-dependent, relationship-sticky, and trade finance-intensive supply chains. These firms are most vulnerable to tariffs and therefore have strong incentives to adjust before tariffs are imposed, despite the cost of reallocation.

Measuring the uncertainty shock

The ‘Liberation Day’ tariffs created a natural experiment. Countries with large trade surpluses against the US faced the threat of ‘reciprocal’ tariff rates as high as 50%, while countries with smaller surpluses or deficits with the US faced a uniform 10% rate.

Because the higher tariffs were postponed pending negotiations, the gap between the announced rate and the implemented 10% baseline provides a measure of TPU. For example, Vietnam faced a threatened 46% tariff, creating massive uncertainty compared to the UK, which is a ‘10% country’. Since the EU faced a 20% Liberation Day tariff, its uncertainty is lower than Vietnam’s but higher than the UK’s (Figure 1).

Figure 1 Trade policy uncertainty from Liberation Day tariffs

Notes: This figure illustrates the implemented and postponed portions of the tariffs announced on “Liberation Day.” The 10% baseline tariff (red) was implemented on all countries on April 5, while the country-specific portions above 10% (green) were postponed until end of July, creating TPU about whether these higher rates would be implemented and at what levels. China’s tariff fluctuated sharply during this period, peaking at 125%, before the portion above 10% was paused on 12 May following a US.China trade deal.

Rapid reallocation to ‘10% countries’

Using transaction-level US import data from S&P Panjiva, we find that US firms responded swiftly to this uncertainty. Two months after the announcement, firms significantly increased import values from ‘10% countries’ (Figure 2) while simultaneously reducing imports from high-TPU countries (Figure 3).

Crucially, this reallocation was driven almost entirely by the extensive margin. Firms established new importing relationships with suppliers in ‘10% countries’ (Figure 2b). Meanwhile, the drop in imports from high-TPU countries was driven by firms severing existing trade ties (Figure 3b). We do not find evidence of stockpiling, as increased imports from low-TPU countries reduced firms’ incentives to continue sourcing from high-TPU countries (Figure 3c).

Figure 2 Firms increased import values from ‘10% countries’

Note: This figure displays the coefficients and 90% confidence interval from Equation (3.2) of our paper, where the dependent variable is the import values of product p by firm f in time t from “10% Countries.” “10% countries” refer to those facing 10% announced “Liberation Day” tariff. The bi-week prior to the April 2 announcement of the “Liberation Day” tariff is the omitted reference period.

The magnitude of this response is striking. The elasticity of trade with respect to TPU is comparable to the short-run elasticity of actual tariffs. Between April and July 2025, a ten percentage point increase in potential tariffs led to a 17% increase in imports from low-TPU countries and a corresponding 17% decrease from high-TPU countries.

Figure 3 Firms decreased import values from ‘high-TPU countries’

Notes: This figure displays the coefficients and 90% confidence interval from Equation (3.2) of our paper, where the dependent variable is the import values of product p by firm f in time t from high-TPU countries. “High-TPU countries” refer to those facing more than 36% announced “Liberation Day” tariffs, corresponding to the top 15 countries with the highest “Liberation Day” tariffs. The bi-week prior to the April 2 announcement of the “Liberation Day” tariff is the omitted reference period

The cost of ‘strategic uncertainty’

Proponents of protectionist policies often argue that tariffs encourage reshoring. However, we find that at the firm-product level, total import values remained largely unchanged. The increase in imports from low-TPU countries fully offset the decline from high-TPU countries. This indicates that firms did not substitute international sourcing with domestic production; they only reallocated imports from high-TPU to low-TPU countries.

This reallocation came at a cost. We document a significant increase in firm-product-level prices for those firms that switched sourcing origins two months after Liberation Day (Figure 4). Switching suppliers requires abandoning specific relationship capital and incurring search costs, which translates into higher import prices — a cost ultimately borne by the US economy.

Figure 4 Firm-product level overall prices increased two months after Liberation Day

Notes: This figure displays the coefficients and 90% confidence interval from Equation (3.2) of our paper, where the dependent variable is the overall price of product p by firm f in time t. The bi-week prior to the April 2 announcement of the “Liberation Day” tariff is the omitted reference period.

Who panics first? Heterogeneous firm responses

Why did firms move so quickly, rather than waiting to see if the negotiations would succeed? We find that the reallocation was concentrated among firms with inventory-intensive and contract-dependent supply chains, as well as those heavily reliant on trade finance.

Inventory-intensive firms are exposed to substantial tariff liabilities and associated liquidity pressures upon restocking. To mitigate these risks, such firms preemptively reallocate imports to low-TPU countries, thereby avoiding being locked into high-tariff suppliers later.

Firms that rely on specialised inputs cannot switch suppliers overnight. If they waited until July and the tariffs were implemented, they would be trapped paying high tariffs while scrambling for alternatives. Therefore, they moved pre-emptively.

Higher tariffs increase the risk of importer default, causing banks to raise the cost of trade finance. Firms reliant on trade finance adjusted early to avoid facing prohibitive borrowing costs later.

Conclusion

We document that a surge in trade policy uncertainty that lasted a few months can induce rapid and substantial adjustments in global sourcing. Even when tariffs are used as a negotiating tactic and may not be implemented, firms still incur real reallocation costs. Our results also indicate that accommodative financial conditions, particularly access to trade finance, help firms adjust their supply chains in an environment of rising TPU and trade barriers. The ‘Liberation Day’ trade policy uncertainty did not drive US firms to replace imports with domestic production.

Source : VOXeu