Annual Review of Economics, 5 (1), 2013
with R. Bems and K.M. Yi
We survey recent literature on the causes of the collapse in international trade during the 2008-2009 global recession. We argue that the evidence points to the collapse in aggregate expenditure, concentrated on trade-intensive durable goods, as the main driver of the trade collapse. Inventory adjustment likely amplified the impact of these expenditure changes on trade. In addition, shocks to credit supply constrained export supply, further exacerbating the decline in trade. Most evidence suggests that changes in trade policy did not play a large role. We conclude that one benefit of the trade collapse is that it has stimulated research in neglected areas at the intersection of trade and macroeconomics.
First Draft: August 2012. Also available as NBER Working Paper 18632.
American Economic Review (Papers & Proceedings), 102 (3), 2012
with G. Noguera
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.
First Draft: December 2011.
Journal of International Economics, 86 (2), 2012
Awarded Bhagwati Prize for the best paper published in the JIE during 2011-2012.
with G. Noguera
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 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.
First Draft: July 2008. June 2009 version (with data for 2001) is here. July 2010 version is here. See also this research summary on VoxEU.
Journal of International Economics, 86 (1), 2012This paper estimates a heterogeneous firms model using sector level data on export participation, trade flows, and unit value prices in a multi-country setting. Examining within-exporter variation in prices across destinations, prices are increasing in the difficulty of entering the destination market in the majority of sectors. This pattern is consistent with models in which product quality is positively correlated with firm size. However, prices decrease in export thresholds in some large sectors, including autos, apparel, and electronics. I discuss the causes and consequences of this cross-sector heterogeneity. From an accounting perspective, selection into exporting explains a small fraction of overall price variation, but accounts for nearly half of variation in bilateral trade.
First Draft: November 2007.
American Economic Review (Papers & Proceedings), 101 (3), 2011
with R. Bems and K.M. Yi
First Draft: December 2010. Online Appendix here.
IMF Economic Review, 58 (2), 2010
This paper uses a global input-output framework to quantify US and EU demand spillovers and the elasticity of world trade to GDP during the global recession of 2008-2009. We find that 20-30% of the decline in the US and EU demand was borne by foreign countries, with NAFTA, Emerging Europe, and Asia hit hardest. Allowing demand to change in all countries simultaneously, our framework delivers an elasticity of world trade to GDP of nearly 3. Thus, demand alone can account for roughly 70% of the trade collapse. Large changes in demand for durables play an important role in driving these results.
First Draft: January 2010. Working paper version here or IMF Working Paper 10/142.
For a summary of this work, see the IMF World Economic Outlook (Oct. 2010, Chapter 4). See also an early research summary, published in "The Great Trade Collapse: Causes, Consequences and Prospects," edited by Richard Baldwin, and available on VoxEU.
with G. Noguera
Revised: January 2014
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. 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 wedges play a dominant role in explaining all five facts. Further, declines in wedges 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). See also this research summary on VoxEU or the Free Exchange column in The Economist magazine.
Five Facts about Value-Added Exports and Implications for Macroeconomics and Trade Research
Revised: January 2014 (Forthcoming in the Journal of Economics Perspectives)
Due to the rise of global supply chains, gross exports do not accurately measure the amount of value added exchanged between countries. I highlight five facts about differences between gross and value-added exports. The differences are large and growing for the world as a whole, and inflate the share of manufacturing in world trade. They are also heterogenous across countries and bilateral partners, and changing unevenly across countries and partners over time. Taking these differences into account enables researchers to obtain better quantitative answers to important macroeconomics and trade questions. I discuss how the facts inform analysis of the transmission of shocks across countries, the mechanics of trade balance adjustments, the impact of frictions, endowments, and comparative advantage on trade, and trade policy.
Revised: October 2013 (Forthcoming in the American Economic Journal: Macroeconomics)
Does input trade synchronize business cycles across countries? I incorporate input trade into a dynamic multi-sector model with many countries, calibrate the model to match bilateral input-output data, and estimate trade-comovement regressions in simulated data. With correlated productivity shocks, the model yields high trade-comovement correlations for goods, but near-zero correlations for services and thus low aggregate correlations. With uncorrelated shocks, input trade generates more comovement in gross output than real value added. Goods comovement is higher when (a) the aggregate trade elasticity is low, (b) inputs are more substitutable than final goods, and (c) inputs are substitutable for primary factors.
First Draft: October 2010. This paper is a revised version of (NBER Working Paper 18240).
Revised: March 2013
Comparative advantage and trade costs shape the geography of cross-border supply chains and trade flows. To quantify these forces, we build a model of trade with multi-stage production that features technology differences both across and within individual production stages. We estimate technology and trade costs in the model via simulated method of moments, matching bilateral shipments of final and intermediate goods for sixteen countries. Using the estimated model, we investigate the extent to which supply chains magnify trade elasticities and respond to changes in trade costs or productivity. We find no magnification effects for moderate changes in trade costs, but relatively large adjustments in supply chains.
First Draft: November 2012.
NBER Working Paper 18498 [VAREER Data]
Revised: October 2012
This paper updates the conceptual foundations for measuring real effective exchange rates (REERs) to take account of the pervasive use of imported intermediate inputs to produce exports. We derive a value-added REER describing how demand for the value added that a country produces changes as the price of its value added changes relative to competitors. We then compute this index using trade measured in value added terms and prices for value added. We identify substantial differences between value-added and conventional REERs. These are driven by the theory-motivated shift in prices used to construct the value-added REER, not changes in bilateral weights.
First Draft: August 2012. See also this research summary on VoxEU.
Recent work studying the factor content of trade raises measured factor content by allowing differences in productivity and/or techniques of production across countries. Reimer (2006) and Trefler and Zhu (2010) criticize this work for its treatment of intermediate goods. Using a definition of factor content that allow for traded intermediates, I decompose the separate influence of production techniques and traded intermediate goods in shaping factor trade. I document that trade in intermediate goods lowers measured factor contents, but substantial factor trade remains and is directionally consistent with factor abundance theory.
Transport Costs and Trade in the Interwar Period
First Draft: November 2006 (Draft available upon request.)
Estevadeordal, Frantz, and Taylor (2003) argue that increased transport costs account for a large share of the decline in trade during the interwar period. Using alternative data and narrative evidence, I argue this emphasis is misplaced and that trade would have been even lower if not for a decline in transport costs during these years.
"Exports, Export Destinations, and Skills" by I. Brambilla, D. Lederman, and G. Porto. AEA Annual Meetings, January 2012.
"Quality Uncertainty and Intermediation in International Trade" by K. Dasgupta and J. Mondria. AEA Annual Meetings, January 2012.
"The Value Added Structure of Gross Exports" by R. Koopman, Z. Wang, and S-J Wei. AEA Annual Meetings, January 2012.
"On the Fragmentation of Production in the US" by T. Fally. Philadelphia Federal Reserve Trade Workshop, November 2011.
"How Large are the Gains from Economic Integration? Theory and Evidence from U.S. Agriculture" by A. Costinot and D. Donaldson. NBER ITI Summer Institute, August 2011.
"Product Differentiation and the Impact of International Trade" by A. Gervais and J. Thurk. Notre Dame Kellogg Institute Conference, April 2011.
"Trade Adjustment and Productivity in Large Crises" by G. Gopinath and B. Neiman. AEA Annual Meetings, January 2011.
"The Great Trade Collapse of 2008-09: An Inventory Adjustment?" by G. Alessandria, J. Kaboski, and V. Midrigan. NBER/ITM Summer Institute, July 2010.
"The Elasticity of Trade: Estimates and Evidence" by I. Simonovska and M. Waugh. AEA Annual Meetings, January 2010.
"Machines and Machinists: The effect of imported capital on wage inequality" by M. Csillag and M. Koren. FREIT/EIIT Conference, November 2009.
"Quality Competition versus Price Competition Goods: An Empirical Classification" by R. Baldwin and T. Ito. SNB/CEPR Conference on Product Heterogeneity and Quality in International Trade, Zurich, August 2009.