Supply Chain Risk, Trade and Economic Fragility

We study how aggregate risk shapes production, trade, and input sourcing in complex supply chains. We develop a quantitative model of sequential production under risk, where each stage sources inputs from multiple origins. Analytically, we first show that sourcing shares equal an input’s expected output elasticity—its expected marginal contribution to output across states. We then establish three further results: risk affects sourcing positionally through offsetting cross-stage complementarity and within-stage substitutability, making the net response a quantitative question; own risk has a negative welfare effect, while risk elsewhere has ambiguous, sometimes positive, effects through relative prices; and risk attenuates comparative advantage, with sequential production amplifying this force. Quantitatively, in a three-stage, fifty-country model, comparative advantage flattens as countries diversify away from their most productive suppliers. Greater supply-chain complexity lowers consumption volatility for riskier countries by providing diversification. Rising Chinese-origin risk reallocates production and generates uneven welfare effects across the chain.