Foreign Intermediate Goods Research Articles

The spillover effect of global uncertainty through input–output linkage

AbstractThis study examines the cross‐country spillover effects of global uncertainty on domestic value‐added by introducing indices for input‐ and output‐linked uncertainty. Employing a panel fixed‐effect regression model, the analysis covers 70 countries from 1995 to 2019, using the World Uncertainty Index and the OECD Inter‐Country Input–Output Table. Our findings reveal that input‐linked uncertainty from procuring foreign intermediate goods has the most significant negative impact on domestic value‐added. The effects of domestic uncertainty and output‐linked uncertainty from foreign product sales follow this. Additionally, these negative effects exhibit a dynamic cumulative impact over time, rather than being confined to a specific period. Considering both the magnitude and duration of these impacts, the primary transmission pathway of global uncertainty on a country's domestic production activity is through its input linkage. Furthermore, the study identifies country‐specific variations in the ripple effects of global uncertainty. Analysing specific cases such as Korea and China affirms the empirical relevance of our findings to their economic contexts.

The role of local currency pricing in the international transmission effects of a government spending shock in an economy with vertical production linkage and foreign direct investment

By constructing a two-country model with asymmetry in price-setting behavior between home and foreign intermediate goods firms, vertical production and trade, and endogenous entry of three types of final goods firms, this paper examines the effects of a home government spending shock. In particular, it focuses on the role of asymmetry in price-setting behavior between home and foreign intermediate goods firms. A home government spending shock is shown to result in the entry of multinational firms from both countries, an increase in the aggregate outputs of both countries, a deterioration in home welfare, and an improvement in foreign welfare. In addition, with an increase in the ratio of home and/or foreign intermediate goods firms setting their export prices in the local currency, the effects of this shock on the entry of home multinational firms, the increase in aggregate foreign output, the deterioration in home welfare and the improvement in foreign welfare are shown to be weakened, while the effects of this shock on the entry of foreign multinational firms and the increase in aggregate home output are intensified.

Kyoto Protocol and global value chains: Trade effects of an international environmental policy

Deepening globalization and international fragmentation of production (IFP) have provided an appropriate foundation for offshore production processes to exploit comparative advantage wherever possible. Unilateral environmental regulations can increase the outsourcing probability of polluting production processes in regions with looser environmental regulations and can consequently alter trade patterns by changing comparative advantage. The Kyoto Protocol (KP) is considered as one of the international but unilateral environmental regulations for coping with climate changes. This protocol was implemented to mitigate emissions in industrial economies, and its potential side effects such as production relocation have always been controversial. Therefore, this study aimed to estimate the impacts of the KP on trade patterns of the ratifying countries within the context of global value chains (GVCs). For this purpose, the difference-in-differences (DiD) regression and the generalized synthetic control method (GSCM) were used to model the panel data during 1990–2017. The estimation results indicated that the KP ratification decreased the forward participation of the committed countries, while increased their backward participation. As a result, it deepened their relative downstream positions in the GVCs. Accordingly, the KP reduced the share of intermediate goods and services exports in committed countries that ratified KP but increased the share of foreign intermediate goods and services in their exports. In addition, some environmental implications and outcomes of these results, especially for the Paris Agreement, were discussed.

Trade in information technologies and changes in the demand for occupations

I use data from the World Input-Output Database and show that trade in information technologies (IT) has a significant contribution to the growth in foreign intermediate goods in the 2001–2014 period. China has strongly contributed to the rise in trade in IT and has become one of the major foreign suppliers of IT. I merge these data with the EU KLEMS database and EU Labour Force Survey and obtain a dataset of 12 European countries and 2001–2007 period. I show that IT imports from China are associated with lower IT prices in European countries. The fall in IT prices has increased the demand for high wage occupations and reduced the demand for medium wage occupations. Nearly 25% of the variation in the demand for occupations can be attributed to the trade with China.

Trade in Information Technologies and Changes in the Demand for Occupations

I use data from the World Input-Output Database and show that trade in information technologies (IT) has a significant contribution to the growth in foreign intermediate goods in the 2001-2014 period. China has strongly contributed to the rise in trade in IT and has become one of the major foreign suppliers of IT. I merge these data with the EU KLEMS database and EU Labour Force Survey and obtain a dataset of 12 European countries and 2001-2007 period. I show that IT imports from China are associated with lower IT prices in European countries. The fall in IT prices has increased the demand for high wage occupations and reduced the demand for medium wage occupations. Nearly 25 percent of the variation in the demand for occupations can be attributed to the trade with China.

Фармацевтика України: від залежності до ендогенного розвитку

The article substantiates various theoretical and applied principles of developing high-tech pharmaceutical industries (HTPI). It is established that the key problem of developing countries in this area is the dependence on resources and markets of developed countries, while the involvement of advanced foreign technologies can be a catalyst for increasing the technological potential of host countries (subject to the availability of proper knowledge and human capital, changes in the institutional environment, and improved the framework conditions for innovation). In the context of the development of HTPI, the author shows the importance of the network nature of the acquisition by pharmaceutical companies of sustainable competitive advantages based on resources that are difficult to simulate or replace. It is substantiated that networks built with local research institutions, higher education institutions, and research units of other companies, give pharmaceutical manufacturers the opportunity to access complementary assets and become their specific resource, which provides unique competitive advantages. The author reveals various methodological and statistical features of the categorization of industries by the level of technology in the conditions of globalization. It is substantiated that the current low value of the ratio of research and development (R&D) to value-added generated by pharmaceuticals of individual countries is not a sign of the industry’s low technological level, as the current revenues are the result of long-term R&D and harmonization procedures for launching new drugs with lags of 10-15 years. A new tool for the study of international trade in high-tech pharmaceuticals is proposed, whose peculiar feature consists in the categorization of nomenclature items by end use; the List of high-tech medical and pharmaceutical intermediate goods is formulated (in accordance with SITC Rev.4 and UKT FEA); the following indicators are proposed: the coefficient of import dependence of pharmaceutical production, the coefficient of "purified" exports of pharmaceutical products and the coefficient of imports coverage with HTPI output, and the formulas for their calculation are provided. The author's approach is the first to create the opportunity to assess the scale of costs and the dependence of the pharmaceutical industry on imported components that embody advanced technologies and are the industrial supplies for HTPI. It was found that in Ukraine the share of foreign intermediate high-tech goods in the consumption of the industry reaches 82.2%; the industry, working on imported substances, produces mainly products for the domestic market, without earning foreign currency, even to cover the cost of purchasing the necessary ingredients; manufacturers do not rely on synthesized chemical products of domestic production, primarily due to the fact that the products of the chemical industry for the needs of pharmaceuticals in Ukraine are virtually non-existent; and the increase in output depends on foreign technologies and intermediate goods. It is substantiated that Ukraine’s pharmaceutical industry is critically dependent on imported supplies to ensure the smooth operation of enterprises and the healthcare industry. Key endogenous barriers that hinder the development of HTPI have been identified, including problems in the training of specialists and a lack of scientists whose competencies would contribute to solving the problems of endogenous development of the industry; lack of state aid to business entities for research, and technological and innovative activities; lack of own funds to increase expenditures on R&D and implementation of large-scale investment and innovation projects; and lack of cheap loans, due to which Ukrainian pharmaceutical manufacturers find themselves in unequal conditions compared to foreign competitors. Conceptual bases of HTPI development in Ukraine are proposed; justified the expediency of legal changes, definition of strategic priorities and introduction of measures of development of HTPI in Ukraine based on the comprehensive approach, which will cover creation and development of pharmaceutical ingredients for medicines (chemical and biotechnological goods), medical products, fillers, packing materials, machinery and equipment for pharmaceuticals to help reduce the dependence on foreign technologies, and to increase the level of production localization, employment and revenues to the budgets of all levels.

Ukraine's pharmaceuticals: from dependence to endogenous development

The article substantiates various theoretical and applied principles of developing high-tech pharmaceutical industries (HTPI). It is established that the key problem of developing countries in this area is the dependence on resources and markets of developed countries, while the involvement of advanced foreign technologies can be a catalyst for increasing the technological potential of host countries (subject to the availability of proper knowledge and human capital, changes in the institutional environment, and improved the framework conditions for innovation). In the context of the development of HTPI, the author shows the importance of the network nature of the acquisition by pharmaceutical companies of sustainable competitive advantages based on resources that are difficult to simulate or replace. It is substantiated that networks built with local research institutions, higher education institutions, and research units of other companies, give pharmaceutical manufacturers the opportunity to access complementary assets and become their specific resource, which provides unique competitive advantages. The author reveals various methodological and statistical features of the categorization of industries by the level of technology in the conditions of globalization. It is substantiated that the current low value of the ratio of research and development (R&D) to value-added generated by pharmaceuticals of individual countries is not a sign of the industry’s low technological level, as the current revenues are the result of long-term R&D and harmonization procedures for launching new drugs with lags of 10-15 years. A new tool for the study of international trade in high-tech pharmaceuticals is proposed, whose peculiar feature consists in the categorization of nomenclature items by end use; the List of high-tech medical and pharmaceutical intermediate goods is formulated (in accordance with SITC Rev.4 and UKT FEA); the following indicators are proposed: the coefficient of import dependence of pharmaceutical production, the coefficient of "purified" exports of pharmaceutical products and the coefficient of imports coverage with HTPI output, and the formulas for their calculation are provided. The author's approach is the first to create the opportunity to assess the scale of costs and the dependence of the pharmaceutical industry on imported components that embody advanced technologies and are the industrial supplies for HTPI. It was found that in Ukraine the share of foreign intermediate high-tech goods in the consumption of the industry reaches 82.2%; the industry, working on imported substances, produces mainly products for the domestic market, without earning foreign currency, even to cover the cost of purchasing the necessary ingredients; manufacturers do not rely on synthesized chemical products of domestic production, primarily due to the fact that the products of the chemical industry for the needs of pharmaceuticals in Ukraine are virtually non-existent; and the increase in output depends on foreign technologies and intermediate goods. It is substantiated that Ukraine’s pharmaceutical industry is critically dependent on imported supplies to ensure the smooth operation of enterprises and the healthcare industry. Key endogenous barriers that hinder the development of HTPI have been identified, including problems in the training of specialists and a lack of scientists whose competencies would contribute to solving the problems of endogenous development of the industry; lack of state aid to business entities for research, and technological and innovative activities; lack of own funds to increase expenditures on R&D and implementation of large-scale investment and innovation projects; and lack of cheap loans, due to which Ukrainian pharmaceutical manufacturers find themselves in unequal conditions compared to foreign competitors. Conceptual bases of HTPI development in Ukraine are proposed; justified the expediency of legal changes, definition of strategic priorities and introduction of measures of development of HTPI in Ukraine based on the comprehensive approach, which will cover creation and development of pharmaceutical ingredients for medicines (chemical and biotechnological goods), medical products, fillers, packing materials, machinery and equipment for pharmaceuticals to help reduce the dependence on foreign technologies, and to increase the level of production localization, employment and revenues to the budgets of all levels.

Production networks under The ASEAN Plus Six. A good deal or a threat?

This study breaks up the gross trade of ASEAN countries into the different components of Value-added trade to analyze the integration of ASEAN into the Global Value Chain (GVC). The study employs a global input-output database using data by the years1997, 2004, and 2012. The research considers the possible effects of expanding ASEAN into an ASEAN Plus Six agreement from the Vertical Specialization point of view. Gross trade is further broken down into nine components of value-added trade which creates a series of indicators of value creation, participation-position in GVC, among others. The study found that ASEAN has made significant gains in enlarging total trade (235%), and thus undergoing a particularly faster growth in production sharing structures. Over the time, ASEAN has assumed a notable function across the GVC as a provider of value-added through parts and components (33%) than as a producer of final goods (30%). Vertical trade accounts for more than 43% of ASEAN gross exports, but it depends on foreign intermediate goods (35%) to produce its exports, most of them are supplied from Asia. ASEAN single production region has gained a little while it has grown with Asian partners and lost market share with NAFTA and Europe. The ASEAN Plus six leads to a broad range of integration and might translate to larger gains than Intra-ASEAN trade. While ASEAN is expanding faster regionally than globally, both in supplies and in demand, the ASEAN internal market might not be large enough to drive growth. Meanwhile the dynamics of ASEAN appear as being part of a strong GVC through Asia.

Specialization in the production of intermediated goods as a primary development and development of international co-operation relations

The article is devoted to the analysis of manifestations and scales of development of the latest international cooperative relations in the context of the export of goods intended for consumption in the process of production (intermediate goods). It has been argued on the basis of international statistics that increasing the volume of intermediate consumption exports is an indirect indicator of the intensification of relations between enterprises through international cooperation. It has been determined that the rapid growth of global value chain creates additional advantages of international cooperation due to diversification of production and sales processes and operations and deepening of inter-country forms of cooperation, in particular through non-equity forms. Therefore, the importance of the current article assumes figuring out the linkage between economic development and the intensity of the counties’ engagement into international cooperation through the production of export oriented intermediate goods; this is the purpose of the article. During the study, it was found that there is no direct influence between the high-tech intermediate goods production and the positioning of the country at high-tech stages in the global value chain. However, empirical studies have also shown that access to a broad list of foreign intermediate goods at competitive prices plays a crucial role in boosting productivity in both developed and emerging economies. Therefore, a perspective direction for further research is the development of regulatory measures aimed at maximizing the potential of manufacturing sector development based on a more complex and dynamic labor division and increasing demand for special intermediate goods and services.

A requiem for the Australian motor vehicle industry

ABSTRACTThe last automobiles manufactured in Australia rolled off the assembly line in the fall of 2017. This article looks at some of the factors that have impacted the industry since 1968 and led to its demise, including a high value of the Australian dollar in recent years, strategic decisions on the part of parent companies and reductions in governmental support and tariff protection. We estimate a cost function for the industry with inputs of domestic capital and labour and insourced intermediate goods as well as imported intermediate goods. The findings include that the remaining firms are operating in an output range of strongly statistically significant economies of scale, and that all of the input pairs are substitutes except for statistically significant complementary relationships between capital and domestic intermediate goods and labour and foreign intermediate goods. Unexpected results are that an increase in output per assembly plant appears to have a positive effect on total cost, while an increase in the effective tariff and an increase in the number of models appears to have a negative effect. One explanation for these robust but unexpected findings may be that total profit contribution is a part of total cost, and, therefore, factors that increase total profit contribution will also increase total cost.

Trade Restrictions in Brazil : Who Pays the Price?

This study finds that a unilateral reduction in Brazil’s relatively high barriers to trade would increase its integration into the world economy and expand production and jobs. Using a multi-region Computable General Equilibrium model that is particularly wellsuited to gauge the impact of trade policy shocks in global value chains, this study documents the effects of reducing important barriers to trade in Brazil: reducing import tariffs and local content requirements, and eliminating indirect taxes levied on exports. The largest gains in production and exports would accrue to manufacturing sectors, contradicting the widespread perception in Brazil that lifting trade protection would reduce the share of manufacturing in production. Moreover, deeper integration into global value chains would raise economic efficiency, and the higher share of foreign intermediate goods used in production would lead to lower prices, boost international competitiveness, and also benefit Brazilian households.

The effects of input tariffs on productivity: panel data evidence for OECD countries

Based on a panel of 16 OECD countries and 10 manufacturing industries over 1996–2007, this paper investigates the impact of tariffs on foreign intermediate goods on productivity growth in downstream manufacturing industries. The results show that imposing tariffs on imported intermediate goods is particularly harmful for industries that operate close to the global technological frontier. We also consider the possibility that input-tariff liberalisation may have different effects depending on the technological content of imported intermediate goods. Our findings suggest that protecting imports of high-technological goods is more harmful for productivity improvements in industries that operate close to global best practice.

Trade Finance Affects Trade Dynamics

Existent literature is by no means conclusive on the effects of trade finance on trade and the economy. We propose a suitable framework to explore the linkages between international trade and finance based on an international real business cycle model where firms require external finance to import and can be financially constrained. We find that credit shocks do affect the dynamic properties of the economy and they have the potential to cause significant deviations in trade and economic performance. The trade-to-GDP ratio falls following a negative credit shock, as the shock reduces the capability of firms to purchase foreign intermediate goods, thereby reducing efficiency and production. However, it forces a demand substitution towards domestic intermediate goods that limits GDP deterioration. We also find that financially developed countries trade more, are richer and more stable in terms of GDP and consumption, consistent with the empirical evidence. Finally, the model sheds light on persistent contradictions between theoretical business-cycle and their empirical counterparts, namely, the consumption/output anomaly and the volatility of consumption, imports and terms of trade relative to GDP.

FTA (A Study on Japan's FTA Strategy and its Policy Implications for Korea)

FTA (A Study on Japan's FTA Strategy and its Policy Implications for Korea)

Optimal monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

By incorporating the factor of firms’ asymmetric price setting behavior into a two-country model with vertical production and trade, we analyze the issues of optimal monetary policies in non-cooperative and cooperative equilibriums. The three main results to be stressed are as follows. First, we show that if the home and foreign countries have identical ratios with respect to intermediate goods firms that set their export prices in the local currency, the optimal monetary stance in a non-cooperative equilibrium is eased in response to an increase in the ratios. Second, under such an optimal monetary stance, we show that welfare is maximized in both the home and foreign countries if all home and foreign intermediate goods firms set their export prices in the local currency. Third, in a scenario where not all home and foreign intermediate goods firms adopt this pricing strategy, we show that there is always a welfare gain from cooperation.

The Financial Channel in International Trade

Abstract Existent literature is by no means conclusive on the effects of trade finance on trade and the economy. We propose a suitable framework to explore the linkages between international trade and finance based on an international real business cycle model where firms require external finance to import and can be financially constrained. We find that credit shocks do affect the dynamic properties of the economy and they have the potential to cause significant deviations in trade and economic performance. The trade-to-GDP ratio falls following a negative credit shock, as the shock reduces the capability of firms to purchase foreign intermediate goods, thereby reducing efficiency and production. However, it forces a demand substitution towards domestic intermediate goods that limits GDP deterioration. We also find that financially developed countries trade more, are richer and more stable in terms of GDP and consumption, consistence with the empirical evidence. Finally, the model sheds light on persistent contradictions between theoretical business-cycle and their empirical counterparts, namely, the consumption/output anomaly and the volatility of consumption, imports and terms of trade relative to GDP.

Vertical Trade, Exchange Rate Pass-Through, and the Exchange Rate Regime

We compare the welfare of different combinations of monetary and currency policies in an open-economy macroeconomic model that incorporates two important features of many small open economies: a high level of vertical international trade and a high degree of exchange rate pass-through. In this environment, a small economy prefers a fixed exchange rate regime over a flexible regime, while the larger economy prefers a flexible exchange rate regime. There are two main causes underlying our results. First, in the presence of sticky prices, relative prices adjust through changes in the exchange rate. Multiple stages of production and trade make it more difficult for one exchange rate to balance the whole economy by adjusting several relative prices simultaneously throughout the vertical chain of production and trade. More specifically, there is a tradeoff between delivering an efficient relative price between home and foreign final goods and delivering an efficient relative price between home and foreign intermediate goods. Second, because the small economy faces a high degree of exchange rate pass-through under a flexible regime, it suffers from a lack of efficient relative prices in vertical trade. The larger economy, however, does not face this problem because its level of exchange rate pass-through is low.

A ray of hope? Another look at the Italian textile industry

Despite increasing competition from newly industrializing countries, Italy’s textile industry has continued to be an important contributor to the domestic economy. Many observers attribute this resilience to the industry’s focus on quality. Here, we take note of that view but also examine production and cost relationships to explore the existence of returns to scale and the interrelationships among inputs to gain additional insights about the future prospects for this industry. The findings are consistent with constant returns to scale and a substitute relationship between all input pairs except for domestic capital and foreign intermediate goods. The results also suggest some increasing flexibility in the labor market, perhaps including informal sector arrangements, greater responsiveness of labor demand to the price of capital, and more international production sharing arrangements. An increasing elasticity over time of the demands for domestic capital and domestic intermediate goods with respect to the price of foreign substitutes was also observed. Since further economies of scale do not exist, maintaining the Italian textile industry’s reputation for outstanding quality will likely be an important survival strategy for some products. For others, production sharing may be necessary to maintain international competitiveness.

Aggregate Imports and Expenditure Components in Turkey

Despite its recent growth performance, the Turkish economy has been experiencing current account imbalances, and has so far been able to continue these imbalances without jeopardizing economic growth. However, recent uncertainties in the world economy have urged policy makers to control these imbalances and to take actions accordingly in the short-run. The literature postulates that expenditure reduction and expenditure switching policies are two conventional measures to implement in an economy suffering from current account deficits. In this regard, the aim of the paper is to examine the role of expenditure components in import demand, which is among one of the most crucial elements of current account items. The empirical results indicate that demand for imports has a very sluggish adjustment process in response to any policy shocks, and consumption and export expenditure together with the relative prices are the important factors that seem to influence this adjustment process. The high dependence of domestic production on foreign intermediate goods and the reluctance of the Turkish entrepreneurs for import substitution (mainly due to an unfavorable business climate) could be regarded as the reason for this sluggish adjustment process of import demand. This research accordingly shows that these conventional measures (such as those that are included by expenditure reduction and expenditure switching policies) might be necessary but not sufficient, and it would require more structural and long-run policy actions to deal with recent current account difficulties in the Turkish case. The empirical findings also indicate that the import requirement of exports is very high. This, together with high import dependency of domestic production, calls for structural and long-run policy actions that would help to increase the value added to Turkish exports.

The Korean textile industry: still competitive, after all these years?

Although a vital part of the economy, the Korean textile industry has been challenged by the recent reduction of international trade barriers, particularly as this industry was fully integrated into General Agreement on Tariffs and Trade (GATT) in 2005. The textile industries in Japan and many other countries have also faced difficulties. This study examines future prospects for the Korean industry by investigating the presence of economies of scale and relationships among the inputs of domestic capital, labour and intermediate goods, as well as foreign intermediate goods. The findings are consistent with constant returns to scale and a substitutes relationship among all input pairs except for domestic capital and foreign intermediate goods. Thus, there appear to be no further cost reductions available through increased output and economies of scale. However, some reduction in industry output may not result in increased unit costs either. A reduction in the price of foreign intermediate goods will not only increase the demand for domestic capital, but also, at least in the short run, add stress to the industry as it decreases the demand for domestic labour and domestic intermediate goods.