Trade In Intermediate Inputs Research Articles

Impact of ICT development on bilateral intermediate input trade: Considering cross-country heterogeneity

ABSTRACT This study investigates the impact of information and communication technology (ICT) on bilateral trade flows, focusing on intermediate inputs across 161 countries from 1990 to 2016. We utilize the Eora global supply chain input-output tables to distinguish trade in intermediate inputs from gross trade. By adopting the Poisson pseudo-maximum likelihood (PPML) estimator, we find that ICT promotes bilateral and intermediate input trade by lowering trade costs. Notably, the similarity in ICT development between home and host countries is positively associated with bilateral intermediate input trade. Furthermore, the positive effects of ICT on bilateral intermediate input trade are stronger in labor-abundant countries than in capital-abundant countries. We also find that the positive relationship becomes more significant in low-income countries than in high-income ones. Labor-abundant and low-income countries are expected to experience an increase in intermediate input trade through ICT development.

Currency misalignments, international trade in intermediate inputs, and inflation targeting

In the literature on optimal monetary policy in open economies, the presence of local- currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production.

코로나19가 최종재와 중간재 무역에 미치는 파급효과 분석

This paper investigates the impact of the Covid-19 on exports and imports. The severity of the Covid-19 is measured by the mortality rate, death cases per 1000 population and confirm cases per 1000 population. It reveals that the mortality rate is the proper proxy variable for the severity of the Covid-19. To guide effective policy responses to the Covid-19, we need to explore the impact of the Covid-19 on demand and supply. Distinguishing between trade in final goods and trade in intermediate inputs, this paper shows that high mortality is associated with the reduction in exports of final goods, intermediate goods, and imports of final goods, indicating that the Covid-19 includes aspects of both demand and supply shock.

Facilitating trade in intermediate goods

A side effect of economic globalisation and new information and communication technologies is the increasing fragmentation of the production process across different countries and continents, contributing to the rise of trade in intermediate goods, which has increased to almost 2/3 of total world trade. Most of this trade, i.e., intermediate goods, are transported by sea. Maritime trade is one of the most economical but also complex ways of trading and transporting goods, requiring good coordination, various stops and controls, transhipments, storage, ICT technology to track the cargo, etc. Therefore, the objective of this paper is to quantify the impact of trade facilitation on trade in intermediate goods on the sample of EU28 countries, using biennial data for the period 2010-2018. We estimate augmented gravity model on bilateral trade data using a Poisson Pseudo Maximum Likelihood (PPML) estimator. Our results suggest that, as expected, logistics, and in particular ICT development, has a significant and positive effect on trade in intermediate inputs, when controlling for other variables in the gravity model such as GDP of trading partners, distance, contiguity, existence of a free trade agreement, exchange rate, and common cultural proxies. Our results support the global trend of development and investment in logistics, and, in particular, new ICT technologies, which can not only contribute to the continued growth of trade in intermediates, but also help mitigate the negative effects of recent global economic shocks.

Skilled immigration, offshoring, and trade

We develop a dynamic general equilibrium model with skilled immigration, offshore labor hiring, and intermediate input trade to study the impact of skilled immigration policy changes in the US. Consistent with the data, the model accounts for a small subset of large firms that adjust offshore labor hiring in response to skilled immigration policy changes. Our calibrated model that matches the US economy shows that if we ignore the offshoring channel, we would overstate welfare gains to skilled domestic wage earners by approximately 20 percent following a 10 percent immigration cap reduction. The paper highlights the importance of considering the interactions between immigration, offshoring, and trade when studying the impacts of skilled immigration policy on domestic labor markets and trade.

Exchange rate volatility and import of intermediate inputs: Evidence from Chinese firms

An extensive amount of literature suggests that exchange rate volatility has a negative impact on international trade. However, very few research consider the distinct effect of exchange rate volatility on intermediate input trade. This paper studies the effects of exchange rate volatility on the import of intermediate inputs and evaluates how the effects are shaped by a series of firm characteristics. Using a comprehensive dataset of Chinese importing firms from 2000 to 2006, our empirical analysis indicates that exchange rate volatility negatively impacts the import of intermediate inputs both on the extensive and intensive margin. Further, we find that this negative effect is more pronounced for firms with higher financial vulnerability. We use a simple schematic diagram to explain the transmission mechanism and emphasize the role of financial vulnerability in amplifying the effects of exchange rate volatility.

China's domestic production networks

This paper examines China's domestic production networks. It uses VAT invoices to build inter-provincial input-output tables for 2002 and 2012. These are combined with population censuses to determine the location of workers involved in production. We document i) increased trade in intermediate inputs between provinces; ii) inter-provincial production fragmentation that differs by product; iii) substitution of domestic for foreign intermediates, resulting in increased domestic value added in exports. Information about the occupations of workers suggest that iv) richer coastal areas such as Beijing, Tianjin, and Shanghai specialize in R&D and marketing activities, whereas v) inland provinces specialize in production activities.

Reduced ‘Border effects’, Free Trade Agreements and international trade

AbstractThis paper studies the impact of ‘border effects’ and the implementation of Free Trade Agreements (FTAs) on international trade in manufacturing goods. We take advantage of the time dimension in a panel setting to capture the rise of trade in final goods and intermediate inputs that are a distinguishing feature of Global Value Chains (GVCs). Our results suggest that reduced border effects account for the bulk of the increase in international manufacturing trade. The cost of a national border is estimated to have fallen by around 4.3% per year for trade in final goods and 2.8% for trade in intermediate inputs. Moreover, we show that it is important to control for different border effects for final goods and intermediate inputs when estimating the trade impact of FTAs in gravity equations. With this enhancement, our results suggest that FTAs increase trade in final goods by 52% after ten years, with no statistically significant difference for trade in intermediate inputs. We also find evidence that FTAs that more comprehensive FTAs like the European Union have a greater trade effect than the average FTA.

International trade barriers and regional employment: the case of a no-deal Brexit

We use the World Input–Output Database (WIOD) combined with regional sectoral employment data to estimate the potential regional employment effects of international trade barriers. We study the case of a no-deal Brexit in which imports to the United Kingdom (UK) from the European Union (EU) would be subject to tariffs and non-tariff trade costs. First, we derive the decline in UK final goods imports from the EU from industry-specific international trade elasticities, tariffs and non-tariff trade costs. Using input–output analysis, we estimate the potential output and employment effects for 56 industries and 43 countries on the national level. The absolute effects would be largest in big EU countries which have close trade relationships with the UK, such as Germany and France. However, there would also be large countries outside the EU which would be heavily affected via global value chains, such as China, for example. The relative effects (in percent of total employment) would be largest in Ireland followed by Belgium. In a second step, we split up the national effects on the NUTS-2 level for EU member states and additionally on the county (NUTS-3) level for Germany. The share of affected workers varies between 0.03% and 3.4% among European NUTS-2 regions and between 0.15% and 0.4% among German counties. A general result is that indirect effects via global value chains, i.e., trade in intermediate inputs, are more important than direct effects via final demand.

Global supply chains, trade agreements and rules of origin

AbstractFree Trade Agreements (FTAs) usually come with restrictions on the use of intermediate inputs in order for final goods to qualify for free trade. I focus on Rules of Origin (RoO), which limit expenses on nonmember country's intermediate inputs. In a three‐country FTA formation game, I introduce international trade in intermediate inputs and RoO restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, measured by their input shares in foreign final goods production, global free trade is less likely to be a stable equilibrium outcome. Free riding is the main problem preventing countries from liberalising trade. Countries are better off being nonmembers of FTAs between the other two countries relative to global free trade. Rules of Origin can solve this problem by limiting the benefits countries get from other countries' free trade agreements. In the case of asymmetric countries, an additional incentive exists for the smaller country not to join: such a country gives up more than it gains from joining an FTA for a sufficiently high degree of asymmetry in country sizes. I show that global free trade is a stable Nash equilibrium under a larger region of asymmetric country parameter space in the case of RoO than without it. Therefore, it is shown that RoO is essential in order to attain global free trade.

Global sourcing under uncertainty

AbstractThis paper develops a general equilibrium model of international trade in homogenous intermediate inputs. In the model, trade between countries is driven exclusively by uncertainty in the delivery of inputs. Because their managers are risk‐averse, final good firms contract with multiple suppliers located in different countries in an attempt to decrease the variability of their profits. The analysis shows that risk diversification provides an incentive for international trade over and above such reasons as comparative advantages (emphasized in classical models of international trade) and economies of scale (emphasized in new trade models) and highlights a new channel—a reduction in uncertainty—through which trade liberalization increases welfare.

Has processing trade made China's exports cleaner? A regional level analysis

This paper investigates the role of processing trade on China’s regional CO2 emission intensity of exports (EIE). We investigate the temporal changes in regional EIEs and their determinants from 2002 to 2012 by using special multi-regional input-output tables that distinguish the production of processing exports from other production at the regional level. By using structural decomposition analysis, we attribute the regional EIE changes into effects of very detailed components, which show the roles of different production types and factors in EIE changes. We find that EIE increased from 2002 to 2007 but decreased from 2007 to 2012. In this regard, processing exports play a decisive role in the first period, making China's exports dirtier, but help exports be cleaner after the crisis. By factor, the input structure reflected by the inter-industry production linkage is the main reason for the different performances of EIEs in the two periods. The interregional trade in intermediate inputs has increased most inland regions' EIEs while decreasing coastal regions' EIEs. • The EIE for most regions firstly significantly increased from 2002 to 2007, and then decreased from 2007 to 2012. • Processing exports play a key role in EIE changes. Their changes increased EIE first and then decreased it. • The effect of input structure is dominant in the total effect of processing exports, with other factors played limited roles. • The different change in the commodity structure of intermediate inputs is the main reason for different performances of EIE before and after the crisis. • The increasing interregional trade has exacerbated the regional inequality in terms of environmental cost from exports.

International Portfolio Investments with Trade Networks

What determines the composition of international portfolio investments remains an open question in international finance. In this paper, I propose a theory of international portfolio choice where trade networks play a key role. I solve in closed form for the optimal equity and bond portfolio investments in a multi-country model with arbitrary global input - output linkages and taste differences. I show that a measure of international demand exposure, called the “International Domar Weights” (IDWs), is key in determining international equity portfolios. The IDWs extend the closed-economy “Domar weights” to the international setting and capture countries' interdependence through both direct and indirect trade linkages. Using data from the World Input - Output Database (WIOD) and Coordinated Portfolio Investment Survey (CPIS), I apply the framework to a network of 43 major developed and emerging economies and obtain four main results. First, the theoretical network portfolio is a significant predictor and explains almost half of the variation in international bilateral portfolio investments. The significance of the network portfolio is robust to controlling for gravity factors (market capitalization, distance, EU membership, etc.). Second, including the network-based portfolio in a gravity model for assets resolves the puzzle of why distance matters for asset trade at all. Third, indirect trade linkages matter for portfolio determination, highlighting the need to explicitly account for trade in intermediate inputs. Finally, the model predicts both the levels and the changes in equity home bias that have occurred since 2000.

Nominal and Effective Rates of Protection by Industry in Pakistan: A Tariff Based Analysis

The study calculates nominal and effective rates of protection and their association with major characteristics of industries—labour intensity, export orientation and revealed comparative advantage. The results indicate that nominal as well as effective rate of protection has declined between two benchmark years—1990 and 2002, but vegetable oil, motor vehicles, and a sector producing intermediate good ‘other manufacturing’ remains highly protected. Overall results reveal that manufacturing import competing sectors enjoy higher protection through trade policy—tariff while negative effective rate of protection for majority of agriculture and services sectors show their disadvantage position in the economy. The results clearly indicate government priority for manufacturing sector over agriculture and services sectors. The results also reveal that effective rate of protection is negatively associated with industrial characteristics such as labour intensity, export orientation, and revealed comparative advantage indicating that a sector needs less protection if it has comparative advantage—labour intensive and produce exportable commodity. The results of the study also indicate that trade policy in Pakistan shifts trade in favours of trade in intermediate inputs in 2002 from trade in final goods in 1990. There is a need to restructure tariff structure to remove bias against agriculture and services sectors. Agriculture where majority of unskilled labour engaged ask immediate action from government to improve the condition of poor.

The Impact of Robot Adoption on Global Sourcing

This paper studies the impact of robot adoption on firms’ global sourcing activities. Using a rich panel dataset of Spanish manufacturing firms, we show that robot adopting firms increased their intermediate input purchases from foreign and domestic suppliers between 2006 and 2016. The effects of robots differ across sourcing strategies: the highest in foreign outsourcing and the lowest in foreign vertical integration. We find that robot adopters fragment their production further by reducing the concentration of purchases from suppliers and the increase in intermediate input purchases is related to quality upgrading to a certain extent. Marginal treatment effects estimates suggest that responses to adoption are heterogeneous: higher probability of adoption intensifies the effects on outsourcing and weakens the effects on vertical integration. In contrast to rising concerns over reshoring, our findings suggest that robots have yet promoted trade in intermediate inputs.

Aggregate fluctuations and the industry structure of the US economy

Abstract In a two-sector economy, changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment-specific and neutral shocks. I document that the cost shares of intermediate inputs produced by the investment sector correlate positively with GDP, whereas those of inputs produced by the consumption sector correlate negatively with GDP. The two-sector model of Greenwood et al. (1988) is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors. Shock amplification — that is, the effect of a sectorial shock on aggregate value added — depends on the degree of heterogeneity in these elasticities of substitution. For a calibrated economy to that of the United States, I find that shock amplification is stronger than in a unitary elasticity economy. It is also stronger than in an economy with a common non-unitary elasticity that is either inferred from data via reduced-form estimates, or calibrated to match the same targets as our benchmark economy.

A Literature Review on Imported Intermediate Inputs and Gains from Trade

Purpose This paper provides a literature review on imported intermediate inputs and gains from trade. With the expansion in global value chains, intermediate input trade has substantially grown to become a major source of gains from trade. Design/Methodology/Approach This paper reviews the theoretical background for gains from trade due to the use of imported intermediate inputs, and surveys a selected number of empirical studies that find substantial gains from trade through access to imported intermediate inputs. Findings Imported intermediate inputs can increase productivity via variety, quality and learning effects. A large body of empirical studies show that the new access to foreign inputs has increased firm-level productivity in several small open developing countries. Furthermore, the use of imported intermediate inputs do not only promote R&D investment and quality upgrading, but also contribute to a drop in consumer prices or an increase in real consumption. Research Implications The review emphasizes the importance of comprehensive research at the firm-level including within-firm extensive margin and identification of channels that raise productivity. In addition, it is worth noting that higher FDI liberalization and deregulation can increase gains from trade through access to new imported inputs.

Intermediate Input Imports, Domestic Input Use and Firm-level Outcomes: Evidence from Survey Data

Imported intermediate inputs, that is, parts and materials sourced from abroad and used to make products either consumed domestically or in producing exported goods are a growing force in world trade. We test for the relative effect of imported intermediate inputs and domestic inputs in promoting foreign exports and various forms of domestic sales, using firm-level survey data. Imported intermediate inputs are found to be associated with higher overall sales, foreign exports and larger sales to multinational companies domiciled in the home country. On the other hand, domestic inputs are not found to have statistically significant positive effect on any firm-level outcomes. Since exporting firms are usually more productive than domestic firms, the results point towards the salience of outsourcing inputs in supporting firm productivity and the importance of policymaking in facilitating trade in intermediate inputs across countries. JEL: F10, F12, F23

The gravity model and trade in intermediate inputs

AbstractIs the gravity model as applicable to trade in intermediate inputs as it is to trade in final goods? One of the contributions of this paper is that we explicitly account for the dual nature of products that can be used as either intermediate inputs or final goods. We find that the structural gravity model performs extremely well for describing bilateral trade in final goods and in intermediate inputs. Moreover, this continues to hold even when we focus on a subset of countries in which intermediate inputs trade accounts for a growing share of trade, namely "Factory Asia." However, the gravity model may perform poorly due to model misspecification (i.e., exclusion of intranational trade) and/or sample selection, even after the model considers the dual nature of products. We demonstrate that the poor performance of the gravity model is not attributable to the large trade flow of intermediate inputs, which supports the continued use of the model as these trade flows continue to grow in importance worldwide.

The nature of trade, global production fragmentation and inflationary dynamics: Cross‐country evidence

AbstractThis study investigates under which circumstances trade has impact on inflation dynamics by examining the independent effects of trade intensity, intra‐industry trade and trade on value added. Trade in goods is decomposed into consumption (final) goods and intermediate inputs to deepen the assessment of the role of the globalisation of production activities on inflation dynamics. Open‐economy new Keynesian Phillips curve (NKPC) analyses suggest that inflation is sensitive to domestic factors and that the relevance of external factors changes with respect to the nature of trade, country groups and time. Vertical intra‐industry trade in intermediate inputs and value‐added trade play important role, whereas final goods trade has no statistically significant effect on inflation dynamics.