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Current Research:

"Trade Costs and Gravity for Gross and Value Added Trade”

Cross-border production fragmentation enables countries to export domestic value added not only directly in the form of gross exports of final goods, but also indirectly by participating in global supply chains. This paper studies the determinants of trade in value added. I incorporate the global input-output structure into an international trade model to derive an approximate gravity equation for bilateral value added exports. I quantify the effects of trade costs using the dataset constructed in Johnson and Noguera (2012), covering 42 countries over 1970-2009. I show that the bilateral trade cost elasticity of value added exports is about two-thirds of that for gross exports. Moreover, bilateral value added exports depend not only on bilateral trade costs but also on trade costs with third countries through which value added transits en route from source to destination. I show that the relative importance of these indirect effects varies significantly across countries and types of trade costs, and has increased over time alongside the rise in production fragmentation.

"A Portrait of Trade in Value Added Over Four Decades" with Robert Johnson

We combine data on trade, production, and input use to compute the value added content of trade for forty-two countries from 1970 to 2009. We highlight five facts about changes in value-added relative to gross exports over time. First, the ratio of value- added to gross exports fell by roughly 10 percentage points worldwide [Fact 1]. Across sectors, the ratio declined nearly 20 percentage points in manufacturing, but rose in other sectors [Fact 2]. Across countries, declines range from 0 to 25 percentage points, with fast growing countries seeing larger declines [Fact 3]. Across bilateral partners, declines are larger for nearby partners [Fact 4] and partners that adopt regional trade agreements [Fact 5]. What driving forces underlie these changes? Using a multi-sector structural gravity model with input-output linkages, we show that changes in trade frictions play a dominant role in explaining all five facts. Further, declines in frictions following trade agreements not only explain bilateral changes, but also account for 20% of the global decline.

This paper is a heavily revised version of "Fragmentation and Trade in Value Added over Four Decades" (NBER Working Paper 18186).

In the media: The Economist, VoxEU, Wall Street Journal.

"Do IMF Programs Really Work?” with Pierre-Olivier Gourinchas

Publications:

"Accounting for Intermediates: Production Sharing and Trade in Value Added" with Robert Johnson

Journal of International Economics, 86: 224-236, 2012.

Winner of the Bhagwati Award for the best paper published during 2011-2012.

We combine input-output and bilateral trade data to compute the value added content of bilateral trade. The ratio of value added to gross exports (VAX ratio) is a measure of the intensity of production sharing. Across countries, export composition drives VAX ratios, with exporters of Manufactures having lower ratios. Across sectors, the VAX ratio for Manufactures is low relative to Services, primarily because Services are used as an intermediate to produce manufacturing exports. Across bilateral partners, VAX ratios vary widely and contain information on both bilateral and triangular production chains. We document specifically that bilateral production linkages, not variation in the composition of exports, drives variation in bilateral VAX ratios. Finally, bilateral imbalances measured in value added differ from gross trade imbalances. Most prominently, the U.S.-China imbalance in 2004 is 30-40% smaller when measured in value added.

In the media: New York Times, VoxEU.

"Proximity and Production Fragmentation" with Robert Johnson

American Economic Review, Papers and Proceedings, 102(3): 407-411, 2012.

Cross-border production chains tend to be local in scope. This suggests that changes in fragmentation over time should be largest among nearby trading partners, and thus may be serving to localize gross trade. Using data on gross and value added trade from 1970-2009, we present three results on the role of proximity in explaining fragmentation: (1) value added to export ratios are lower and are falling more rapidly over time within geographic regions than between them; (2) gross trade travels shorter distances from source to destination than trade in value added, and this gap is growing over time; (3) bilateral value added to export ratios have fallen most among nearby trading partners.

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Last updated: December 19, 2014