Trade Frictions and Global Value Chains

Project Outcomes Statement

This project studies the specialization of countries within global value chains in a world with barriers to international trade. The goal has been to develop frameworks to analyze the optimal organization of a sequential production process consisting of N stages to be performed sequentially in any of J countries. A key aspect of the analysis is the presence of transportation costs across countries which, other things equal, create a force towards concentrating the various stages of a value chain within a single country.

From a theoretical standpoint, understanding how firms choose their global sourcing strategies is a challenging question to tackle because the decisions of where to locate two distinct stages of production are mutually interdependent through overall supply chain linkages and cannot be studied separately. In the central paper of this proposal, we develop a tractable approach for studying this question and find that one of key factors driving supply chain decisions is proximity to final consumers. In a nutshell, we show that, all else equal, more central countries should be located at more downstream stages. That is, since final goods must be shipped to final consumers it is often attractive to produce the last stages of production in countries that are close to where the products will be consumed. Thus, geography can play a role as an additional source of comparative advantage for those countries located close to large consumption markets. At the same time, this does not mean that far away countries will lose from trade. Rather, because all countries have final consumers firms may develop separate supply chains for serving different markets and this flexibility arises from the possibility of slicing the supply chain across stages of production.

From an empirical point of view, our framework is useful for evaluating trade policies in the context of supply chain integration. Indeed, as may be intuitive, when trade barriers are reduced from autarky levels, the first form of supply chain integration occurs regionally and when trade barriers are reduced sufficiently these give way to global supply chain integration. The postwar era led to vigorous supply chain integration within Europe and within South East Asian countries and we are now at a point in which supply chain integration has gone fully global and intermediate inputs are sourced in many developed countries from all other parts of the world.

A second paper in this project studies the role of trade costs in the positioning of countries global value chains through a more traditional Input-Output analysis. Relative to previous literature, we offer a structural interpretation of various measures of GVC positioning developed in the literature, which allows us to study how counterfactual changes in trade frictions would affect the positioning of various countries in GVCs.

In a third paper, this project has studied the interplay between global value chains and the global assembly strategies of multinational companies. We develop a multi-country model in which firms decide on the location of their assembly plants (i.e., their assembly strategy) as well as the source of the inputs used in their plants worldwide (i.e., their global sourcing strategy). Our framework identifies a natural complementarity between these two strategies and delivers novel implications for the role of geography in shaping the global production strategies of firms. Empirically, we merge U.S. Census data with BEA data on multinational activity to document a series of novel facts regarding the global assembly and global sourcing strategies of U.S. firms. We next develop new tools to structurally estimate the model and perform a counterfactual that illustrates the rich implications of changes in trade costs on global production patterns.