This paper studies the propagation of import competition shock along the supply chain. We find that a large reduction in import tariffs in a customer industry induces suppliers to choose more conservative financial policies via transmission of contraction and distress risk. We show that firms lower their leverage more when they are involved in more relationship-specific investments with their customers and when they are more concerned about distress. Moreover, firms adjust their leverage mainly by issuing more equity. We also show that firms increase their cash holdings and limit their trade credit provision.

JEL Classification: D43, F12, G32, G33, L22

Key words: Globalization; Import competition; Customer-supplier links; Capital structure