The COVID-19 pandemic exposed the critical importance of supply chain resilience for economic efficiency and welfare, yet the role of government interventions in disrupting supply chains remains underexplored. This paper examines the allocative and welfare effects of intentional supply chain disruptions through government interventions, using China's intranational local content requirement (LCR)—a form of local protectionism that compels firms to source inputs from within their province—as a case in point. I develop a spatial general equilibrium model with input-output linkages across sector-location pairs, where LCR manifests as sector-specific taxes on interprovincial firm-to-firm trade. The model yields gravity equations and guides empirical identification. Using comprehensive firm registration data, I estimate border effects on firms' location choices, finding that entry responds more strongly to buyer/supplier density within provinces than across provincial borders. These border effects are robust to extensive controls for confounding factors, including infrastructure, culture, industrial policies, and politician characteristics. Instrumental variable estimations using Bartik instruments confirm causal interpretations. I attribute the border effects to LCR through three empirical measures—contractual disputes, government procurement premiums, and tax benefits—and through a staggered judicial reform that dampens protectionism. The analysis reveals that LCR creates two distinct mismatches: between buyers and suppliers across space, and between firm entries and optimal locations. While LCR benefits protected sectors in localities with comparative advantage, it imposes negative externalities on neighboring regions. Counterfactual simulations calibrated through indirect inference indicate that eliminating LCR would improve welfare by 3.055%. These findings contribute to understanding government-induced supply chain disruptions and inform policy debates on market integration.

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