Engaging Customers, Embracing AI: How Suppliers Respond to Trade Tensions and Improve Performance

Academic Summary: Firms face intensifying pressure to innovate amid escalating US–China trade tensions. This study investigates how they integrate artificial intelligence (AI) to respond to such disruptions. We reconceptualize induced innovation theory as adversity-induced innovation theory and test hypotheses using data from listed Chinese manufacturing firms, WTO tariff records, and customs data (2015–2022). Results indicate that higher tariff exposure increases AI integration, particularly among firms with stronger customer engagement needs. AI integration improves supply chain efficiency, sales performance, and market value. However, performance benefits follow an inverted U-shape: extreme tariff exposure diminishes AI's compensatory effects. The study extends induced innovation theory to geopolitical adversities and advances stakeholder engagement theory by identifying customer engagement as a boundary condition for technology adoption. We establish causal relationships between tariff-induced AI integration and firm performance through instrumental variable analysis and robustness checks. Findings inform how firms can strategically use technological innovation and customer collaboration to strengthen resilience under external shocks. Managers should view trade tensions as catalysts for AI integration rather than merely as obstacles. Managerial Summary: Firms facing trade tensions should view them as catalysts for strategic AI integration rather than merely as obstacles. Our research shows that firms experiencing higher tariff exposure that invest in AI achieve measurable improvements in supply chain efficiency, sales performance, and market valuations. However, AI's compensatory benefits diminish at extreme tariff levels, revealing an optimal investment threshold that managers should consider. The benefits of AI integration are particularly strong for firms with high customer engagement needs, such as those with concentrated customer bases, substantial international sales, or significant customer-specific investments. To maximize returns, managers should prioritize AI technologies that strengthen customer relationships by enhancing communication, responsiveness, and service personalization during trade disruptions. Successful implementation requires navigating technical and organizational challenges, including talent acquisition, data quality concerns, and integration complexities. Despite these hurdles, our findings confirm AI's strategic value as a compensatory innovation tool that not only mitigates tariff impacts but also transforms supplier-customer relationships. By aligning AI initiatives with customer engagement objectives, firms can turn geopolitical adversity into a competitive advantage. Companies that integrate AI strategically can maintain operational continuity, preserve market position, and emerge stronger from trade disruptions.