Trade In Intermediate Inputs Research Articles

Export Market Destinations, Imported Intermediates, and Productivity: Firm-level Evidence from Ghana

ABSTRACT This article explores whether the use of imported intermediates has a moderating impact on the productivity effects of export market destinations using data from Ghanaian manufacturing firms over the period of 1991 to 2002. The results show that the use of imported inputs in the production process helps firms that export outside Africa alone to enhance productivity compared to non-exporting firms. In contrast, firms that export outside Africa alone, but do not use imported inputs in the production process have lower productivity compared to non-exporting firms. Policies that promote trade in intermediate inputs across borders can help to enhance productivity.

Thirlwall\u2019s Law and uneven development under Global Value Chains: a multi-country input\u2013output approach

A notable macroeconomic explanation of uneven development, with particular relevance to developing countries, has been the problem of balance of payments constraints, as captured by Thirlwall’s Law: where relative growth rates are explained by differences between income elasticities for exports and imports. Araujo and Lima have formulated a one-country multisectoral disaggregation of this hypothesis using a vertically integrated input–output framework, which is extended here in two main ways. First, international trade in intermediate inputs—the basis for Global Value Chains—is introduced; second, the model is extended to multiple countries. The main outcome of the paper is the development of a new multisectoral method for modelling balance of payments constraints: a Multi-Country Sectoral Thirlwall Law (MCSTL) under which key sector relationships are nested in intercountry trading relationships that encompass both intermediate and final goods. The identification of this input–output structure is developed in analytical stages, moving from a one-country vertically integrated system, to two, three and finally multi-country systems. In addition to its theoretical contribution to understanding the industrial structure of trade, an implication of this multi-country/multi-sector approach is that it can also be tested in future empirical work using the recently available World Input–Output Database of national tables.

Global Trade in Final Goods and Intermediate Inputs: Impact of FTAs and Reduced 'Border Effects'

International trade in manufacturing goods has risen strongly over the past decades, contributing to the expansion of global value chains (GVCs). This paper studies how two factors contributed to this rise since 1970: (i) declining “border effects” that are arguably related to the ICT revolution that started around 1985, and (ii) the implementation of Free Trade Agreements that have gotten deeper over time. We take advantage of the identification of the time dimension in a panel setting to capture the emergence of GVCs by disentangling domestic and international trade in final goods and intermediate inputs. According to our results, diminished border effects account for the bulk of the increase in international trade in manufactured goods. The cost of a national border is estimated to have fallen by around 10% per year for total manufacturing trade since the 1970s. The decline has been 13% per year for exports of final goods and 8% for intermediate inputs, highlighting the importance of reduced border effects for enabling international trade in the age of GVCs. 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 by 54% after ten years. We also find evidence that FTAs that are more recent have a greater trade effect than those signed in earlier periods.

Global Sourcing under Uncertainty

This paper develops a general equilibrium model of international trade in homogeneous 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.

Intellectual property, tariffs, and international trade dynamics

The emergence of global value chains leads not only to a magnification of trade in intermediate inputs, but also to extensive technology diffusion. Moreover, the lack of enforcement of intellectual property rights has recently become a subject of debate in the context of China-US trade negotiations. In this paper, the interaction between tariffs and the enforcement of intellectual property rights is studied within a quantitative general equilibrium framework. Results indicate that tariffs could be an effective deterrent for weak protections for intellectual property and weakening enforcement of intellectual property rights may be a strong deterrent for raising tariffs.

Value Added and Productivity Linkages Across Countries

What is the relationship between international trade and business cycle synchronization? Using data from 40 countries, we find that GDP comovement is significantly associated with trade in intermediate inputs but not with trade in final goods. Motivated by this new fact, we build a model of international trade that is able to replicate the empirical trade-comovement slope, offering the first quantitative solution for the Trade Comovement Puzzle. The model relies on (i) global value chains, (ii) price distortions due to monopolistic competition and (iii) fluctuations in the mass of firms serving each country. The combination of these ingredients creates a link between domestic measured productivity and foreign shocks through trade linkages, generating a disconnect between technology and measured productivity. Finally, we provide empirical evidence for the importance of these elements in generating a link between foreign shocks and domestic GDP.

THE GREAT TRADE COLLAPSE: AN EVALUATION OF COMPETING STORIES

The reduction in international trade has been more than the reduction in economic activity during the 2008 financial crisis, against the one-to-one relationship between them implied by standard trade models. This so-called the Great Trade Collapse (GTC) has been investigated extensively in the literature resulting in alternative competing stories as potential explanations. By introducing and estimating a dynamic stochastic general equilibrium model using 18 quarterly series from the USA, including those that represent the competing stories, this paper evaluates the contribution of each story to GTC. The results show that retail inventories have contributed the most to the collapse and the corresponding recovery, followed by protectionist policies, intermediate-input trade, and trade finance. Productivity and demand shocks have played negligible roles.

New imported inputs, wages and worker mobility

Abstract We study how firms and industries adjust to increasing international trade in intermediate inputs. In particular, we provide a comprehensive assessment of the effects of new imported inputs on wage dynamics, on the skill-composition of the labor force, on worker mobility, and on assortative matching between firms and workers. We employ matched employer-employee data for Italy, over 1995–2007. We complement these data with information on the arrival of new imported inputs at the industry level. We find new imported inputs to have a positive effect on average wage growth at the firm level. This effect is driven by two factors: (1) an increase in the white-collar/blue-collar ratio; and (2) an increase in the average wage growth of blue-collar workers, while the wage growth of white collars is not significantly affected. The individual-level analysis reveals that the increase in the average wage of blue collars is driven by the displacement of the lowest paid workers, while continuously employed individuals are not affected. We estimate the unobserved skills of workers. We find evidence that new imported inputs lead to a positive selection of higher-skilled workers, and to an increase in the degree of positive assortative matching between firms and workers.

International accreditation, linguistic proximity and trade in medical services

The recent growth in the globalization of medical services has attracted broad attention from scholars and policymakers. The intimacy and risk associated with many medical services makes these markets especially sensitive to trade barriers, transaction costs and asymmetric information. This paper uses a gravity model to investigate the factors associated with the global pattern of bilateral trade in medical services. Using data from the United Nations International Trade in Services Database, we differentiate between trade flows in which the recipient travels to the service provider, ‘medical tourism,’ and those trade flows in which the service is delivered to the recipient, ‘other health services.’ Our findings indicate that, after controlling for various economic, historical and geographic linkages, linguistic proximity and international accreditation are not significant predictors of the bilateral pattern of medical tourism, though they are associated with greater trade in other health services. We argue the key difference is that trade in other health services, including medical transcription, diagnostic analysis and laboratory services, is akin to trade in intermediate inputs. The medical service providers contracting for these services are especially sensitive to risk and have strong incentives to monitor quality. By contrast, medical tourism is a market in which patients do not have strong incentives to engage in costly monitoring or information gathering. Providers seeking to market their services to patients abroad have mitigated the effects of linguistic dissimilarity and asymmetric information by exploiting the strong complementarities between medical and non-medical tourism services.

The role of R&D and input trade in productivity growth: innovation and technology spillovers

Productivity improvements generally are driven by technology innovation and its spillovers. This study explores the role of R&D investment and intermediate input trade in productivity growth using country-industry-level data for 25 advanced and emerging economies. This paper confirms that R&D investment and intermediate input import/export (both intra- and inter-industry) with technologically advanced economies play important roles in productivity growth in non-frontier countries. We further find that the productivity gains of technology spillovers via input trade channels are likely larger for countries/industries where technology converges to the frontier. These findings imply that the recent slowdown in R&D investment and intermediate input trade in some advanced economies may contribute to declining productivity growth. The potential productivity improvements from R&D investment and free trade as well as the importance of domestic capacity in facilitating technology spillovers should be recognized.

Trade in intermediate inputs, customs unions, and global free trade

AbstractIn a three‐country customs union (CU) formation game, I introduce international trade in intermediate inputs and rules of origin (RoO) restrictions. In the case of symmetric countries, I show that as countries become more involved in global supply chains, global free trade is less likely to be a stable equilibrium outcome. RoO can help solve this problem. In the case of asymmetry, depending on the degree of the globalization, free riding (for high degree) or exclusion motive (for low degree) prevents global free trade. Correspondingly, I show that RoO can have helpful or detrimental effects on attaining global free trade.

THE INVOLVEMENT OF SLOVAKIA IN INTERMEDIATE TRADE

Fragmentation of production processes across borders represents a new paradigm of foreign trade. The new organization of production processes at the global or regional level opposite to a national level has been manifested by huge increase of trade in intermediate inputs. The world trade is growing fast and is largely driven by the intermediate trade. Countries that do not significantly engage in intermediate trade and achieve low labour productivity growth rates, have seen lower growth rates of value added. Therefore, the aim of this article is to investigate the involvement of Slovakia in use and trade in intermediates. We analyze the import and export of intermediates using data from world input-output database. The results for Slovakia show that the trade in intermediates has experienced a significant shift over last 14 years. The volume of intermediate trade remarkably grown moreover the dynamic of its change overcomes the growth of gross output as well as value added. At the same time, the Slovak industrial sectors have increased demand for imported intermediate inputs; furthermore the difference between imported and exported intermediate inputs rises.

Rue the ROOs: Rules of origin and the gains (or losses) from trade agreements

ABSTRACTThis article provides three-good, three-country examples of trade in both intermediate inputs and final goods. These show the adverse effects that rules of origin (ROOs) can have, even in a world where every country has a free trade agreement (FTA) with every other country. ROOs may cause ubiquitous FTAs to yield a level of welfare, for everyone, that is worse than if there were no FTAs at all, and all trade were subject to common nondiscriminatory tariffs. Thus, the move to an ever increasing number of FTAs may be reducing world welfare.

Institutional quality and trade in intermediate goods

PurposeRecently published studies stress the importance of trade in intermediate goods. The literature on determinants of trade, however, have largely focused on the sources of comparative advantage in determining aggregate trade flows rather than trade in intermediate goods. The purpose of this paper is to examine the role of institutional quality and trade costs to explain the determinants of trade in intermediates.Design/methodology/approachThe simple model is based on the model of comparative advantage in the gravity framework used by Eaton and Kortum (2002) and Chor (2010) to relate trade flows of intermediate goods to institutional parameters, factor endowments and geography. The empirical tests use a data set containing 172 countries and 17 industries spanning ten years.FindingsThe results confirm the theoretical prediction that a country with higher institutional quality has a comparative advantage in institution-intensive goods and trade costs have a negative effect on trade. The author further finds that these effects are stronger in share of trade in intermediate goods vis-à-vis final goods.Originality/valueTo highlight the distinct nature of trade in intermediate goods, the author separates industry trade flows as intermediate input trade and final goods (consumption goods) trade to compare the importance of different sources of comparative advantage among different types of trade flows. Unlike Eaton and Kortum (2002) and Chor (2010) who used cross-sectional data for final goods trade, the ten-year industry-level panel data are used to compare the relative importance of institutions and geography as determinants in trade in intermediate goods compared to final goods trade and capture the macroeconomic time variant factors as well as industry–country pair characteristics. A significant caveat in gravity regression is that an empirical finding may often be driven by omitted variables. Inclusion of a set of country variables such as GDP, production costs and institutional level may still allow omitted variables to bias the estimation. To avoid this problem, the author includes a fixed effect of exporter and importer as well as industry and year, instead of a set of country characteristics.

Why is carbon leakage for energy-intensive industry hard to find?

A number of researchers have found that imports by pollution heavy industries do not increase in response to tighter pollution policy. We empirically evaluate the impact of an sudden and unexpected increase in Swedish electricity prices in the 2000s on the imports of intermediate inputs by Swedish manufacturers. We find that imports declined as domestic electricity prices rose for firms with the most electricity-intense in-house production. We rationalize these findings by developing a simple model of trade in intermediate inputs, which illustrates that energy-intense firms may decrease imports if it is sufficiently difficult to substitute between domestic- and foreign-sourced inputs as domestic energy prices rise. The offshoring mechanism which we identify can help to reconcile conflicting empirical results in the carbon leakage and pollution haven literature, and also has implications for determining the extent to which energy intense trade-exposed sectors should be exempt from domestic climate change policy.

Global Supply Chains, Trade Agreements and Rules of Origin

Free 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 liberalizing 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.

Production Integration in the European Union

Measured by trade in intermediate inputs, economic integration has increased between 2000 and 2014 between members of the European Union and even more with non-members. Integration is negatively related to economic size and positively to the number of years as a member. Germany is the largest hub in the production network and the centre of gravity has moved eastward. Older member states are increasingly exporting service inputs and new member states primary and manufacturing inputs. Wages are increasing faster in countries with low initial wages, indicating wage convergence as a result of production integration.

The Network Origins of the Gains from Trade

This paper argues that the determinants of the welfare gains from trade have fundamentally changed with the emergence of a global production network. Towards this end, we study a Ricardian trade model featuring trade in intermediate inputs, and develop a novel comparative statics approach to decompose the total welfare effect of an arbitrary trade cost shock into several meaningful, easily quantifiable, channels. This decomposition uncovers a unique feature of supply chain trade: the gains from trade are not so much determined by a country's access to the technologies and markets of its direct trade partners, but rather by a country's network exposure to countries further up- or downstream in the global production network. We develop a set of simple statistics to measure each country's network exposure, show how it predicts the gains from trade, and identify each country's key trade intermediaries, i.e., countries that primarily determine its network exposure.

Production Integration in the European Union

Measured by trade in intermediate inputs, economic integration has increased between 2000 and 2014 between members of the European Union and even more with non-members. Integration is negatively related to economic size and positively to the number of years as a member. Germany is the largest hub in the production network and the centre of gravity has moved eastward. Older member states are increasingly exporting service inputs and new member states primary and manufacturing inputs. Wages are increasing faster in countries with low initial wages, indicating wage convergence as a result of production integration.

Embodied carbon emissions accounting, decomposition, and allocation of responsibilities in global trade: Based on the generalized hypothetical extraction method

This paper uses the 1995–2009 World Input-Output Databases, the multi-regional input-output analysis, and the generalized hypothetical extraction method to study the effect of the international trade on the embodied carbon emission of 41 countries. The results calculated by the hypothetical extraction method show that (1) America, Japan, and Germany were the top three countries with the largest gap of the embodied carbon emissions in 1995, and America, China, and Germany became the top three countries in 2009; (2) compared with the final goods trade, the intermediate input trade had a greater influence on the embodied carbon emissions for most countries in 1995 and 2009; the effect of the intermediate input trade on the emissions decreased, while the effect of the final goods trade increased from 1995 to 2009; and (3) the developed countries replaced the production of emission intensive goods by importing from the developing countries. These results implied that both producers and consumers should share the responsibilities for the carbon emissions.