Lecture 6: International Fragmentation
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1 Lecture 6: International Fragmentation Gregory Corcos Isabelle Méjean International Economics 17 December 2014
2 International Trade Introduction 1 Globalization in the Data Part 1: New Trade Models, Same Old Gains? 2 Trade Under Perfect Competition 3 Trade Under Imperfect Competition 4 Welfare Analysis Part 2: Topics in International Trade 5 Trade and Quality 6 International Fragmentation of Production 7 Trade and Inequality 8 Trade in Services
3 Lecture 6: Outline 1 Introduction 2 Measuring fragmentation 3 Upstreamness 4 A theory of offshoring
4 Definitions Fragmentation: specialization of different countries into different stages of the same production process a.k.a. vertical specialization, production sharing,... Offshoring: relocation of production stages to a foreign country Outsourcing: contracting out production stages to an independent supplier Intrafirm trade: international trade between firms having ownership links ( related parties ) Upstreamness: distance between a production stage and final demand
5 Value-added trade GDP measures value-added created in a country. Trade flows measure the gross value of products crossing borders. They embody value-added from different countries. Belgium, Hong Kong, Singapore have trade/gdp ratios over 100%. Value-added trade measures the value-added created by a country in its exports.
6 Why study fragmentation? An estimated 2/3 of world trade is in intermediates (Johnson and Noguera JIE 2012). Ample anecdotal evidence of an increase in fragmentation since the 1990 s. Empirical validation of trade theories requires a measure of value added trade, not gross trade flows. Trade imbalances may be misrepresented by gross trade flows. Trade flows may have a different behavior over business cycles than GDP, especially during recessions. Fragmentation may explain some of the international transmission of shocks.
7 Source: Kraemer et al (2011).
8 Hummels, Ishii and Yi (JIE 2001) HIY measure vertical specialization by the imported input content of exports. A theoretical measure is: vs c X c = S s ( Mcs Y cs X cs ) X : exports; Y : gross output; M: imported intermediates; s: sector; c: country; S number of sectors. In practice, M cs is not measured, and many goods may be both inputs and final goods use input-output matrices. Let A m and A d be S S matrices such that a d st: value of domestic inputs from sector s per euro of t s sales a m st: value of imported inputs from sector s per euro of t s sales X c
9 The simplest equivalent to the theoretical measure is: VS c X c = 1 X c ea m X e (1,S) : all-ones vector. X (S,1) vector of exports in all sectors. But it does not capture inputs used indirectly in exports... Denote by Q x (S,1) the vector of output of exported goods plus all inputs used in that output, in all sectors, i.e. Q x = X + Empirical VS measure: VS c X c + k=1 (A d ) k X = (I A d ) 1 X = 1 X c ea m (I A d ) 1 X Data on A d and A m in 10 OECD countries, Results: VS c X c increased from in 1970 to 0.2 in growth in VSc X c contributed to 30% of export/gdp ratio growth
10
11 Johnson and Noguera (JIE 2012) Extension of HIY allowing for exports of inputs that are imported back or redirected further down the value chain. S sectors, N countries, one variety per country-sector. Denote y i (s): output of is. x ij (s): exports of is to j. f ij (s): final consumption of variety is in j. m ij (s, t): intermediate consumption of is by sector t in j Market clearing, assuming equal foreign and domestic prices: x ij (s) = f ij (s) + y i (s) = S m ij (s, t) t N f ij (s) + j N j S m ij (s, t) t
12 Denote by A ij the S S matrix with element a ij (s, t) m ij(s,t) y j (t). Denote by y i and f ij the S 1 vectors of y i (s) and f ij (s). A ij y j denotes use of inputs from i in j so that y i = N f ij + j N A ij y j Gross output y i includes final goods and all intermediates used in successive rounds of production in country i. Consider now A, the N N matrix of bilateral matrices: A = A A 1N A N1... A NN y = j y 1 y 2... y N f = The S N market-clearing conditions are written j f 1j j f 2j... j f Nj y = Ay + j f j y = (I A) 1 j f j
13 Decompose y i into gross output (inputs and final goods) absorbed by each destination country j, denoted y ij : y 1j f 1j y 2j... = (I A) 1 f 2j... y Nj f Nj In each sector of country i, compute the VA/output ratio r i (t) = y i(t) j s m ji(s, t) = 1 a ji (s, t) y i (t) j s Value added from i absorbed in j ( value-added exports ): VA ij s va ij (s) = s Value added to exports (VAX) ratio: r i (s)y ij (s) where X = x (s). VAX ij = VA ij X ij
14 Example: 3 countries (US, China, Japan), one sector per country. 2 only exports a final good to 1. 1 and 3 only export inputs to 2. All countries produce for the domestic market. y 1 a 11 a 12 0 y 1 f 11 y 2 = 0 a 22 0 y 2 + f 21 + f 22 y 3 0 a 32 a 33 y 3 f 33 This can be solved as: y 1 y 2 = y a 11 a 12 (1 a 11 )(1 a 22 ) a 22 0 a 32 (1 a 33 )(1 a 22 ) 1 1 a 33 f 11 f 21 + f 22 f 33 Chinese exports to US include US content, hence VAX 12 < 1. Gross trade statistics overstate Chinese exports to US. Chinese exports to US include Japanese content. Gross trade statistics understate Japanese exports to US.
15 Johnson and Noguera (JIE 2012, NBERwp 2012) GTAP data on 94 countries and 57 sectors in exports decomposition e S 1 : all-ones vector. ex ij = e(f ij + A ij y jj ) + ea ij y ji + ea ij y jk }{{}}{{} k j,i Absorption Reflection }{{} Redirection bilateral adjusted VA trade balances changes in VAX and vertical specialization over time
16
17 Figure: Gross and VA bilateral trade balances of the US, by partner, in Adjusted refers to a correction for processing trade.
18
19 Upstreamness How do countries specialize vertically? How upstream is their production? What are the determinants of upstreamness? Two measures of upstreamness: 1 Antràs and Chor (ECM 2012) 2 Fally (2012) Antràs, Chor, Fally and Hillberry (AER p&p 2012) show they are equivalent and provide empirical determinants.
20 Upstreamness: measure 1, closed economy Consider first a closed economy. Recall that production in sector s can be written as: y(s) = f (s) + t a(s, t)f (t) + u a(s, u) t a(s, t)f (t) +... Antràs and Chor (2012) weigh each term of the sequence by 1 plus the number of stages before final consumption. U 1 (s) = 1 f (s)+2 t a(s, t)f (t)+3 u a(s, u) t a(s, t)f (t)... A greater number indicates greater upstreamness.
21 Upstreamness: measure 2, closed economy Each industry t consumes a share d(s, t) a(s,t)y(t) y(s) of the production of s. Denote by the matrix with representative element d(s, t). Measure 2 is defined by U 2 (s) = 1 + t d(s, t)u 2 (t) The more upstream your customers industries, the more upstream you are. This implies U 2 = (I ) 1 e Antràs et al. (2012) show that U 1 and U 2 are equivalent.
22 Upstreamness: open economy In a open economy y(s) = f (s) + t a(s, t)y(t) + x s m s We would like to measure α st = asty(t) x(s,t)+m(s,t) y(s), but data on m(s, t), x(s, t) are usually not available. If we assume that domestic, import and export content are identical, then we can use â(s, t) = y(s) a(s, t) y(s) + x(s) m(s) instead of a(s, t) in the above definitions of upstreamness.
23 Upstreamness: Determinants Antràs et al. (2012) compute values of both indices using an IO matrix with 426 industries in the US in At the industry level: U ranges from 1 (19 industries) to 4.65 (Petrochemicals), with a mean of within manufacturing, capital-intensive industries are more upstream, skill-intensive industries are less upstream At the country level, upstreamness is negatively correlated with skill abundance, credit/gdp and Rule of Law.
24 .30 with a standard ntion is restricted to ws, this mean falls to viation of This t many primary and stries tend to be relrt upstreamness do ss country income nsideration all trade amness of countries uartile is 2:41 (stan- ) versus 2:26 (stanfor the highest ing on manufacturing country upstreamd 2:10 respectively. nship between cound export upstreamerestingly, we do obhe top income quarerms of their average oduction lines, while iation across poorer sion (see ACFH for ssion, Table 3 examwith more downstream exports; this needs to be taken with a pinch of salt though, as this correlation is no longer signiöcant when only manufacturing trade áows are considered. Table 3. Export Upstreamness and Country Features (1) (2) (3) (4) Log(Y/L) *** 0.156** (0.032) (0.054) (0.060) (0.142) Rule of Law 0.313*** 0.164* (0.070) (0.091) (0.103) Credit/Y 0.404*** 0.437*** (0.128) (0.136) Log(K/L) School (0.131) 0.085*** (0.031) N R Notes: Robust standard errors reported. ***, **, and *denotesigniöcanceatthe1,5and10percentlevels respectively. REFERENCES Antr s, Pol, and Davin Chor ìorganizing the Global Value Chain.î
25 Grossman and Rossi-Hansberg (AER 2008) Grossman and Rossi-Hansberg (AER 2008) offer a model of trade in tasks. Continuum of production tasks j [0, 1], part of which are offshored. 2x2x2 model: 2 countries, Home and Foreign 2 goods, i = 1, 2 2 factors of production, L and H 2 types of tasks, each requiring 1 unit of a different factor.
26 Grossman and Rossi-Hansberg (AER 2008) Tasks have different offshoring costs: H tasks cannot be offshored L tasks can be offshored at cost βt(j) > 1 units of labor, t (j) > 0. captures the idea that codified tasks are easier to offshore, while all tasks offshored require more costly monitoring Suppose L wages are lower in Foreign: w L < w L. Home firms offshore task j iff βt(j)w L < w L Firms offshore tasks [0, J] and produce [J, 1] at home, with βt(j)w L = w L
27 Grossman and Rossi-Hansberg (AER 2008) Producing one unit of good costs: c i = a Li (w L (1 J) + w L βt (J)) + a Hiw H where T (J) = J 0 t(j)dj Using the task cutoff condition this can be rewritten as: c i = a Li w L Ω + a Hi w H where Ω = 1 J + T (J) t(j) > 1. A decrease in offshoring costs β leads to a fall in Ω, which is equivalent to labor-augmenting technological progress.
28 Grossman and Rossi-Hansberg (AER 2008) Suppose Home takes world prices as given (small open economy). Perfect competition at Home implies a zero profit equation p i = a Li w L Ω + a Hi w H, i = 1, 2 This pins down the value of Ωw L and w H irrespective of β. A decrease in β must imply an increase in w L. GRH call this effect the productivity effect (of offshoring on Home unskilled labor wages).
29 Grossman and Rossi-Hansberg (AER 2008) Productivity effect: offshoring acts as unskilled-labor-augmenting technological progress. In the basic model, unskilled workers gain from offshoring! As in HOS, the growth in the unskilled-intensive sector dominates the substitution away from unskilled workers. In general, however, offshoring has an ambiguous effect on unskilled workers because of: terms of trade effect: if Home is large, then a fall in β reduces the world price of the L-intensive good and w L. labor supply effect: in some (e.g. specific factors) models, reabsorbing idle unskilled workers in the labor force reduces w L.
30 Conclusions Global increase in vertical specialization, decrease in VAX ratio Value-added trade measures shed new light on trade deficits. Upstreamness is negatively correlated with skill abundance and strong financial and legal institutions. Further reading: responses of trade flows to changes in trade costs and income Yi (JPE 2003): offshoring explains half of postwar trade growth, explaining strong response to trade liberalization. Bems, Yi and Johnson (NBER wp 2012): offshoring explains the disproportionate trade collapse theories of global supply chains: Antràs and Chor (ECM 2013): incentives to outsource a task depend on its upstreamness Costinot, Vogel, Wang (RES 2012): countries with lower probability of mistakes specialize downstream North-North offshoring model, based on scale economies, not wage differences (Grossman and Rossi-Hansberg ECM 2012)
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