<scp>MNE</scp> retrenchment and redeployment in the face of the <scp>US</scp> –China trade war: Real options and strategic flexibility

Abstract Research Summary Trade wars increasingly manifest in the contemporary environment for global business; thereby, calling for examination of MNE strategic responses. MNEs can respond to such shocks by leveraging their strategic flexibility and engaging in retrenchment and redeployment; that is, the respective scaling down (up) of subsidiary operations in affected (alternative) nations. While alternative subsidiaries logically enhance retrenchment, real options reasoning suggests additional contingencies—shock exposure, internal redeployment options, managerial control and switching costs—that accentuate both retrenchment and redeployment. Using the US–China trade war as an empirical context, we employ panel data composed of up to 2325 Chinese subsidiaries of US MNEs to conduct difference‐in‐differences analysis. Empirical results indicate that MNEs strategically respond to trade wars in a manner consistent with the strategic flexibility framework. Managerial Summary We examine how MNEs strategically adapt their subsidiary operations to the eruption of trade wars. We find that US MNEs scaled down their Chinese operations and scaled up their surrogate‐nation operations when exposed to US–China tariff escalation. Moreover, the presence of alternative subsidiaries enhances the scaling down of Chinese operations. MNE subsidiary operations characterized by the presence of trade‐war export exposure, lack of diversification outside tariff‐escalation sectors, parent‐majority control, and labor‐intensive production also exhibit pronounced strategic responses. MNEs accordingly respond to trade wars by leveraging their respective flexibilities in both withdrawing and reallocating resources across their network of subsidiary operations. Managers should therefore view such networks as critical assets for sustaining operational resilience in an era of rising trade‐policy uncertainty.