Value chains and tariffs
According to the 2020 World Development Report the establishment of value chains involves substantial search costs for the participants as downstream firms hunt for suitable suppliers and upstream firms seek customers. They require matching of compatible partners to ensure productive exchanges and they often are governed by incomplete contracts that give rise to frequent renegotiation. The assumption of free trade is what makes this costly process worthwhile.
In September 2018, new tariffs levied by the United States covered 82% of intermediate goods imported from China, but only 29% of final consumer goods and 38% of capital equipment. In this paper Grossman and Helpman examine whether these tariffs on intermediate goods forced the reorganization of global value chains.
They use a difference-in-difference methodology with monthly U.S. customs data for imports of intermediate goods at the HTS10-country-of-origin level for the period from January 2016 through October 2019. Their results provide some evidence of the relocation of supply chains from China to the other LCCs. Grossman and Helpman develop a model with two sectors, one that produces a homogeneous good with labor alone and another that produces differentiated products. Each producer prefers to engage input suppliers in a low-wage country and incurs search costs for identifying a potential supplier of an input. The authors argue that when large tariffs are imposed on inputs the welfare costs are quite complex. In particular:
Changes in output levels, factor mix, negotiated prices, and search costs all must be taken into account. Analytical results remain elusive. But numerical calculations with plausible parameter values suggest that 25 percent tariffs on inputs imported through global supply chains impose sizable welfare losses on the country that levies them and that the losses escalate rapidly at high tariff rates.
When Tariffs Disrupt Global Supply Chains
Authors: Gene M. Grossman, Elhanan Helpman
From: Princeton University, Harvard University
Value chains and COVID
Does “renationalization” of global supply chains make countries more resilient in the presence of a pandemic? Bonadio et al., in this paper, quantify the role of the global supply chains in the economic impact of the Covid-19 pandemic using a model of world production and trade covering 64 countries on all continents and 33 sectors spanning all economic activities. They find that:
- On average in the 64 countries studied the downturn would actually be slightly worse with renationalized supply chains (−30.2%) than under current levels of trade. The reason is that eliminating reliance on foreign inputs increases the reliance on domestic inputs. Since a pandemic-related lockdown also affects domestic sectors, there is generally no resilience benefit from renationalizing international supply chains.
- There is no sector in which supply chain renationalization notably improves resilience, measured either by GDP, or by value added of the sector itself.
- Unilateral reopening of large economies like China, US, Germany, or Russia would have a noticeable impact on others. These countries’ opening can raise GDP in some of the most tightly linked countries by up to 2.5%.
Global Supply Chains in the Pandemic
Authors: Barthélémy Bonadio, Zhen Huo, Andrei A. Levchenko, Nitya Pandalai-Nayar
From: University of Michigan, Yale University, University of Texas at Austin
