Pricing the Global Trade Vulnerability

We document the emergence of a priced global trade risk factor amid heightened trade uncertainty. Using granular bill-of-landing data, we measure trade vulnerability by firm-level country exposure – firms with concentrated exposure to a small number of countries are more vulnerable to disruptions in global trade. Hypothesizing that the global trade vulnerability has emerged as a systematic risk, we estimate its market price by sorting stocks into portfolios with varying degrees of country concentration. Relative to low-concentration firms with diverse country exposure, high-concentration firms are riskier and earn a significantly higher risk premium, consistent with our hypothesis of a priced global trade risk factor. Triggered by the 2018 US-China tariff war and exacerbated by Covid-19 supply chain disruptions, concentrated exposure to China is a key driver to the estimated risk premium of high-concentration firms. Pushing beyond China, the broad-based Liberation Day tariffs hit the pricing of medium-concentration firms the hardest, reflecting the evolving nature of trade vulnerability.