How Do International Trade Shocks Propagate Through Domestic Supply Chains? Connecting World Input-Output Tables and Firm-Level Supply Chain Data

Abstract

This study shows how import and export shocks propagate through domestic supply chains by using actual Japanese supply chain data and a world input-output table based on firm-level agent-based simulations. We propose three different models to connect the domestic firm-level supply chain to the world input-output table. Then, we estimate the value-added losses of Japanese firms caused by shocks of different magnitudes and durations originating in China, in the EU and US, and globally. The losses caused by Chinese and European and US shocks are comparable to those caused by global shocks, which indicates the importance of China and the EU and US for Japanese supply chains, although their trade volumes are 21.2% and 25.9%, respectively. The volume and the rates at which losses increase are very different across the connection models, which indicates that the assignment of international connections to firms matters greatly and that it is not appropriate to make naive assumptions, such as that sectoral-level supply chain models are equivalent to firm-level supply chain models. The losses increase sublinealy as the duration expands, which indicates that the shock propagation ultimately saturates the economy. The speeds of saturation differ substantially depending on the assignment of international connections. Finally, the losses increase superlinearly as the initial reduction rate increases. This is because there is a greater probability of one supplier being replaced by other suppliers if the reduction is smaller.