Trade Policy and Global Value Chains
Paper Session
Sunday, Jan. 9, 2022 3:45 PM - 5:45 PM (EST)
- Chair: Kristy Buzard, Syracuse University
The Cost of Dissolving the WTO: The Role of Global Value Chains
Abstract
As trade agreements face renewed pressure, we show that the rise of global value chains has multiplied the value of trade agreements to unprecedented levels. We cast our argument using a non-parametric neoclassical trade model that accommodates global input-output networks and nests a wide class of quantitative trade models as a special case. To guide our analysis, we derive analytic formulas for optimal non-cooperative trade taxes in this general framework. These formulas predict the extent of trade restriction if global trade agreements were to dissolve. Mapping these formulas to data, we quantify the value of trade agreements for various countries. We find that the disintegration of existing trade agreements will erase 30% of the overall gains from trade, which amounts to a $2.8 trillion loss in global GDP. Around 46% of this value is driven by the agreements’ facilitation of global value chains.Firm Input Choice under Trade Policy Uncertainty
Abstract
We examine the role of trade policy uncertainty in shaping the import decisions of firms. If the adoption of a new input requires a sunk cost investment, then the prospect of price increases in that input, e.g. due to trade barriers, reduces the adoption of that input (a substitution effect) and possibly other inputs (complementarity via lower profits). Thus trade policy uncertainty can affect a firm’s entire input mix. We provide a new model of input price uncertainty that captures both effects and derive its empirical implications. We test these using an important episode that lowered input price uncertainty: China’s accession to the WTO and the associated commitment to bind its import tariffs. We estimate large increases in imported inputs by firms from accession; the reduced uncertainty from commitment generates substitution effects larger than the reductions in applied tariffs in 2000-2006 and has significant profit effects.Optimal Trade Policy with General Non-Separability
Abstract
Canonical models of trade policy assume that consumption and production decisions are separable across goods. However, much recent work on trade policy investigates mechanisms which violate these assumptions, such as global supply chains or selective tariff reductions on intermediates. In these settings, general analytical solutions for optimal trade policy are not known, and consequently much recent works relies on simplifying assumptions or computational methods to characterize optimal policy. In this paper I develop analytical solutions for optimal trade policy in a general setting with non-separable demand and supply, and including both protectionism and terms-of-trade manipulation. I also estimate the relevant parameters in a model-consistent way. To demonstrate the effectiveness of this approach, I use the model to estimate political weights for traded industries in the U.S., and I show that incorporating cross-industry forces (such as intermediates use) changes the resulting estimates significantly.Discussant(s)
Justin Pierce
,
Federal Reserve Board
Fernando Parro
,
Pennsylvania State University
Robert Johnson
,
University of Notre Dame
Ralph Ossa
,
University of Zurich
JEL Classifications
- F1 - Trade