Implications of Value Added Trade for Trade Policy and Monetary Policy

Transcription

1 Implications of Value Added Trade for Trade Policy and Monetary Policy Kei-Mu Yi Federal Reserve Bank of Minneapolis World Bank Conference on the Fragmentation of Global Production and Trade in Value-Added June 10, The views expressed here are those of the authors are are not necessarily reflective of views of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

2 Introduction Focus on two themes: More and better data on global value-added chains will Facilitate sharper and more accurate estimates of effects of reductions in trade costs. In a world with production fragmentation and the possibility of fragmentation, effects of declines in trade costs are magnified. Assist in formulation of better monetary policy. Monetary policy response to global value-added chain disruptions depends on duration and timing of disruption, and relative size of resulting supply and demand effects.

3 Trade and Trade Costs in a Standard International Trade Model Two countries, Goods produced in one stage, Ricardian comparative advantage, Eaton-Kortum productivities. m = (1 + τ) n m = gross import share of GDP (relative to import share under frictionless trade) τ = trade cost (tariff, transport cost, etc.) n = elasticity

4 Trade and Trade Costs in a Model with Vertical Specialization Same set up as in previous slide, except production occurs in two sequential stages. To facilitate an analytical expression, restrict where the first stage can be produced. This maximizes vertical specialization, and the trade effect of lower trade costs: m = 2 1+θ n( 1 + (1 + τ) 1 θ ) θ = share of stage-2 production consisting of stage-1 goods Suppose θ = 2/3. Then a decline in trade costs will have about five times the effect on trade as in a world where goods are produced in a single stage. Effect on welfare may also be larger. Key parameter is θ. This must come from the data. In a richer model, we would need many θ s corresponding to different sectors and countries.

5 Implications In order to have accurate assessments of the trade, GDP, and welfare effects of reductions in tariffs, or improvements in transportation infrastructure, (or reductions in any other trade barriers), we need to have: Accurate assessment of both gross and value-added trade at the country-sector pair level over time Quantitative descriptions of the network of global value-added chains and production fragmentation for all the important traded goods. Focus on particular goods

6 Production Fragmentation, Global Value Chains and Monetary Policy How does the nature of the global value-added chain affect the formulation of monetary policy? Monetary policy responds to shocks. The right response depends on the nature of the shock, which depends on the nature of the global value-added chain. Japan earthquake and tsunami

7 Vertical Specialization, Global Value Chains, and Monetary Policy Key issue 1: Timing and duration of shock If the shock lasts a few months, i.e., within the long and variable lags duration before monetary policy starts to work, then no role for monetary policy. Knowledge of global value-added chain must include duration at each step in the chain more relevant the more global the chain. Even the chain within a country matters, because whether production is in one location or dispersed across many locations will have consequences for timing and duration.

8 Vertical Specialization, Production Fragmentation, and Monetary Policy Key issue 2: Supply or demand? The more global the chain, the less of a supply shock in the country where shock originated, and the more of a supply shock in other countries. Three demand forces: Permanent income effects on consumption demand Precautionary motives on consumption and investment demand Marginal product of capital effects on investment demand Research with New Keynesian models suggests: The greater the supply (relative to demand) shock, the more policy should tighten. Caveat: Depends on extent of wage stickiness

9 Implications In order to have the right monetary response to shocks like the Japan earthquake and tsunami, we need to have: Quantitative descriptions of the network of global value-added chains and production fragmentation for all the important traded goods. A key part of this is timing information

10 Implications The situation in Japan following the tsunami and earthquake may provide opportunity to get such detailed data. The focus within each company on their global supply chains was probably unprecedented, both in terms of what the chain actually was, and in terms of finding substitutes. There is a tremendous amount of GSC knowledge capital residing in these companies right now, and over time it will, like all capital, depreciate. Before that happens, let s get it. World Bank has a history of providing tremendous public good in this. Two examples: Regulation of Entry (2000+,Djankov and many co-authors) Investment Climate Survey of Indian Industry (2004, WB and CII). Only this kind of data can answer the questions on duration and timing, and on supply and demand, and ultimately inform the models and frameworks that monetary policymakers employ.