Use Of Imported Inputs Research Articles

Import Content of Turkish Production and Exports: A sectoral analysis

This study investigates the evolution of the import content of production and exports in Turkey for the 2002–2018 period. Based on 2002 and 2012 input-output tables and a large data set of production and foreign trade, we estimate the production and imported input use for 20 sectors, mainly from the manufacturing industry. We calculate import requirement ratios, comprising both direct and indirect effects, for each sector using the Leontief inverse matrix. Our findings indicate that import dependency increases for exports, but stays relatively stable for production over time. In general, the import content of production is lower than that of exports. This difference is mainly attributable to the services sector, which has low import dependency, yet a large share in production. Sectors with the highest import requirements are those with higher capital and technology intensity, such as petroleum products, basic metals, and motor vehicles. Agriculture, forestry and fishery; services and mining sectors have the lowest import requirements.

Critically Important: The Heterogeneous Effect of Diplomatic Tensions on Trade

With global value chains interlocking today’s economies, what is the impact of diplomatic tensions on international trade? We exploit variation in monthly data on imports, a measure of imported input use in the domestic economy, and the incidence of bilateral diplomatic tensions to show that their impact on trade is heterogeneous across countries and industries. Trade in industries that are crucial for domestic production is more sensitive to political tensions. We expose the underlying mechanism in a simple framework before testing it in reduced form.

Manufacturing agglomeration and export dynamics across Indian states

We track the impact of industrial agglomeration on the export behaviour of manufacturing plants in the organized sector across the Indian states during 2008–2009 through 2013–2014, at disaggregated 4-digit industry level. In our dynamic probit analysis, we find that manufacturing plants in industries with increasing agglomeration are more likely to export, and there is strong evidence of positive spillover effect of local exporting plants. Moreover, prior export experience of a plant, growth in its factor productivity, and greater use of imported-inputs in production significantly enhanced its export propensity. Among the infrastructure facilities, road density is confirmed to be a key factor in enhancing export behaviour. However, power availability appears to be a non-critical factor, suggesting that exporting plants in India rely on captive power generation in the face of electricity shortages.

Imported inputs and the gains from trade

This paper characterizes how plant-level heterogeneity in imported input use affects the aggregate welfare gains from trade. Heterogeneous plants choose a fraction of inputs to source from the lowest cost source country, with the rest purchased domestically. Sourcing more inputs requires higher up-front fixed costs, but reduces variable input costs, so import shares are increasing in plant size. Welfare gains are inversely proportional to the general equilibrium elasticity of the aggregate import share with respect to variable trade costs. A standard bilateral gravity regression underestimates this elasticity by not capturing the effects of trade costs on the input sourcing decision. The welfare gains from trade in the model are therefore lower than the gains implied by a gravity-based estimate of the trade elasticity. When calibrated to Chilean plant-level data, this difference is substantial.

Critically Important: The Heterogeneous Effect of Politics on Trade

There is strong empirical evidence showing that political relations have an impact on aggregate bilateral trade flows. In this paper, we show that the impact is heterogeneous across products, depending on product characteristics. Specifically, imported products used as intermediate inputs intensively may be more sensitive to adverse shocks. This is particularly relevant in the current context of increased international input linkages. We sketch a simple theoretical framework and test the mechanism in reduced-form. We implement a difference-in-differences approach with monthly trade flows and a novel dataset of diplomatic incidents. We find that a negative shock to political relations leads to a general decrease in trade flows, and that the response is larger for products in markets with low price gaps to alternative sourcing partners and high direct and indirect imported input use.

Dominant Currency Paradigm: A New Model for Small Open Economies

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Dominant Currency Paradigm: A New Model for Small Open Economies

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Errors from the 'Proportionality Assumption' in the Measurement of Offshoring: Application to German Labor Demand

Offshoring – the importing of intermediate materials and services – has expanded rapidly in most industrialized countries and its impact on the labor markets in these countries has been the source of enormous debate in both scholarly and popular circles. Since data on imported inputs at the sectoral level are not available for the US and the UK, empirical research has relied entirely on a proxy-based measure offshoring, using what the OECD refers to as the “proportionality assumption.” That is, every sector is assumed to import inputs of each material and service in the same proportion as its economy-wide use of that input.German input-output data differentiate between domestically purchased inputs and imported inputs, which permits us to calculate a direct measure of sectoral imported input use. In this paper, we compare this measure to the proxy-based measure based on the standard proportionality assumption. We find that the direct measure differs significantly from the proxy-based measure for both services and materials offshoring. To assess the significance of using different measures, we substitute them for each other in standard labor demand equations focusing on German manufacturing between 1995 and 2004. We find that using the direct measure of offshoring gives very different results for labor demand – sometimes of opposite sign – compared to estimates using the proxy-based measure.We perform a simple decomposition of the proxy-based measure and find that it fails to accurately capture the cross-sectoral variation in offshoring intensity because – as a result of the proportionality assumption – it is heavily influenced by the cross-sectoral variation in domestic input demand. The implications of our findings go beyond the case of Germany. They indicate that researchers must be cautious about drawing policy conclusions from estimates using the proxy-based measure of offshoring.

The Sensitivity of the CPI to Exchange Rates: Distribution Margins, Imported Inputs, and Trade Exposure

This paper quantifies the relative importance of the different channels of CPI responsiveness to exchange rates and import prices across 21 industrialized economies. The paper provides new and rich cross-country and cross-industry details on the sensitivity to exchange rates of distribution margins; the extent of imported inputs use in different categories of consumption goods; and on their role in consumption of nontradables, home-produced tradables, and imported goods. The dominant channel for CPI sensitivity is through the costs arising from imported input use in goods production. This channel is more important than changes in prices of imported goods directly consumed.

Exchange Rate Implications for Australian Manufacturing Investment and Exports

This paper uses time series data on individual industries to examine the relationship between exchange rates and investment for Australian manufacturing. The results show that the investment response to exchange rate changes for the total manufacturing sector varies positively with the export share of sales and negatively with the imported input use, but most individual industries do not show similar effects. The level of import competition is not a significant influence for either the total manufacturing sector or for individual industries. Exchange rate effects are limited to investment in equipment plant and machinery, with little impact on investment in buildings and structures.

Pass-Through of Exchange Rates to Consumption Prices: What has Changed and Why

In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sectoral expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods.

Employment versus Wage Adjustment and the U.S. Dollar

Using two decades of annual data, we explore the links between real exchange rates and employment, wages, and overtime activity in U.S. manufacturing industries. Especially in industries with lower price-over-cost markups, exchange rates have statistically significant effects on industry wages, with the magnitude of these effects rising as industries increase their export orientation and declining as imported input use becomes more important. Exchange rate implications for jobs and hours worked are smaller and less precisely measured. We find a much higher response of overtime wages and overtime hours to transitory exchange rates movements.