At a seminar hosted by APARC’s Taiwan Program, National Chengchi University’s Hsiao-Hui Lee, a professor of management information systems, dissected how global trade shocks propagate not only through trade flows of physical goods but also through financial flows, particularly trade credit, within supply chain networks. Against the backdrop of shifting U.S. trade policies and geopolitical upheavals, Lee's research offers insights for policymakers and businesses navigating the complex landscape of global trade and supply chain resilience. Through a Taiwan lens, her analysis underscores the importance of managing not just the logistical but also the financial linkages of global supply chain networks.

Global trade is interconnected through global supply chains via direct and indirect trade. Geopolitical events, natural disasters, and unexpected shocks disrupt these connections, creating ripple effects across global supply chain networks. Events ranging from the 2008 financial crisis to the 2011 East Japan earthquake and tsunami, the COVID-19 pandemic, and, more recently, U.S.-China trade tensions, the Russia-Ukraine war, and the Trump administration’s executive orders all accentuated vulnerabilities within these interconnected frameworks.

Lee’s main point is that shocks in an industry or a region can propagate across supply chains not only through transactions but also via the movement of trade credit, which allows firms to buy inventory and delay payments. For suppliers, this mechanism provides a financial buffer that helps maintain liquidity and manage cash flows. Indeed, trade finance supports 80 to 90 percent of global trade, according to the World Trade Organization.

Yet, trade credit comes with its own set of risks that may amplify financial stress across supply chain networks and propagate shocks. And if one firm defaults, then the impact can cascade through the supply chain, affecting multiple sectors. Trade creditors experience substantial losses when debtors fail, and these losses can increase the bankruptcy risk for suppliers, demonstrating how financial stress can spread through trade credit links. For example, during the 2008 financial crisis, a significant contraction in trade finance availability led to a 12% decline in international trade. This shortage of financing disrupted global supply chains, causing widespread economic contraction. 

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Political leaders aiming to secure supply chains have touted risk-mitigating strategies such as reshoring (repatriating raw material production and manufacturing), nearshoring (moving far-flung sourcing points to closer countries and regions), and friendshoring (relocating supply chains to allied countries where the risk of disruption from political chaos is low). Each strategy offers unique potential benefits, like reduced transportation costs or enhanced political stability. For instance, the U.S. CHIPS Act aims to bolster domestic semiconductor manufacturing, while the United States-Mexico-Canada Agreement (USMCA) helped facilitate duty-free access to U.S. markets.

Lee’s research, however, is a cautionary examination of the trade credit interdependence inherent in these common outsourcing strategies and their influence on shock propagation. She argues that, while relocating production closer to home or to friendly nations is beneficial, the politics of relocation often overlook the financial linkage risks introduced by extensive trade credit networks. Taiwan’s manufacturing ecosystem – concentrated around semiconductors, electronics, and precision components – is particularly illustrative of this complexity, with high levels of inter-firm trade credit amplifying liquidity stresses during trade shocks.

Using empirical models, Lee’s analysis shows that in-country shock propagation tends to be stronger than cross-border transmission. Yet, the intricate web of cross-border trade credits means that even with reshoring or nearshoring strategies, Taiwanese suppliers, for example, remain financially interlinked with foreign customers, like Apple and Nvidia. Therefore, demand shocks in one region may still create repercussions in Taiwan's local cash flow chains.

Lee suggests that implementing robust risk management practices – such as credit insurance, diversification of credit sources, and realignment of supply chains – can help mitigate these risks.
 

Key Takeaways: Global Trade and Credit-Driven Co-Movement

For Global Stakeholders:
 

1. The Importance of Credit Chain Interdependence: Trade credit chain linkage risks can propagate global trade shocks.
2. Pros and Cons of Outsourcing Strategies: While reshoring, nearshoring, and friendshoring have clear benefits, each also presents unique challenges and risks, particularly due to trade-credit interdependencies.
3. Complexity in Trade-Credit Networks: Extensive trade credit links represent an often-overlooked risk in corporate relocation decisions.
4. Supply Chain Resilience Strategies: Supply chain resilience requires managing not only logistics but also financing networks.

For Taiwan:
 

1. Taiwan’s Manufacturing Ecosystem Dynamics: The island nation’s manufacturing sectors heavily depend on inter-firm trade credit networks, which can amplify liquidity stresses during shocks.
2. Financial Ties Remain Despite Reshoring Efforts: Even with U.S. reshoring or nearshoring efforts, Taiwanese suppliers remain financially tied to foreign customers, making them susceptible to demand shocks abroad.
3. Financial Flexibility for Stability: Firms such as TSMC, Hon Hai, and Delta Electronics leverage factoring and receivables sales to stabilize working capital, indicating that financial flexibility is key to resilience.
4. Enhancing Economic Fortitude: Expanding supply-chain finance platforms and trade-credit insurance could boost Taiwan’s resilience amid export bans or geopolitical disruptions.