Global Value Chains and the Transmission of Business Cycle Shocks. Byron Gangnes Alyson C. Ma Ari Van Assche

Transcription

1 F ore c a s t P roj e c t Global Value Chains and the Transmission of Business Cycle Shocks Byron Gangnes Alyson C. Ma Ari Van Assche P roj e c t LINK F a l l Me e t i ng New York, NY O c t obe r 22-24, 2012

2 Overview Global Value Chains and Transmission of Shocks Japan earthquake 80 and Thailand floods demonstrated vulnerability of production in GVCs Popular view that GVCs played a role in the Great Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 North America South and Central America European Union (27) China Hong Kong Indonesia Japan Korea, Republic of Malaysia Philippines Singapore Trade Collapse -40 Taiwan Thailand Viet Nam -60

3 Overview Evaluating GVCs and business cycle transmission Existing evidence that GVCs increase trade sensitivity and business cycle transmission Unclear through which channels Is it just that GVCs are primarily in durable goods? (composition effect) Or there something inherent in GVC trade? (supply chain effect) A problem is identifying GVC trade in the data Our study Panel analysis is context of workhorse trade equation to look at alternative channels of transmission Use of Chinese customs data for non-processing and processing trade (GVC trade)

4 Globalized production

5 East Asian specialized in durable goods Data Source: authors calculations, using CEPII BACI data.

6 East Asia as factory to the world East Asia's final durables exports East Asia's intermediate durables imports 16,4 54,8 28,8 East Asia Non- Asian OECD Rest of the World 23,6 1,3 75,1 East Asia Non- Asian OECD Rest of the World Data Source: CEPII BACI Trade data.

7 East Asia s dependence on West Direct and indirect exports to US, EU as share of GDP, Direct exposure to US Direct exposure to EU Indirect exposure to US Indirect exposure to EU Source: Ma and Van Assche, 2012

8 GVCs need not increase trade sensitivity Intermediate + final good production E x p o r t s Consumption Intermediate good production E x p o r t s Final good assembly E x p o r t s Consumption 10% drop in consumption leads to 10% drop in trade 10% drop in consumption leads to 10% drop in trade

9 How might GVCs increase trade sensitivity? Through which channels might GVCs influence international transmission of business cycle shocks? Composition effect International production fragmentation concentrated in durable goods sectors, which are more sensitive to demand fluctuations Is the income elasticity of exports larger for durable goods?

10 How might GVCs increase trade sensitivity? Through which channels might GVCs influence international transmission of business cycle shocks? Supply chain effects -- Characteristics inherent to GVCs because of their vertically specialized supply chain structure? GVCs more reliant on just-in-time production that permits rapid production adjustment? Within industries, are income elasticities larger with intra-gvc trade? Bullwhip effects Does rapid inventory adjustment lead to larger effects as the shock moves up the value chain? - Does the elasticity of import demand w/r/t exports exceed 1? - Is the effect larger in industries with high demand uncertainty?

11 Bullwhip effect Source: Ma and Van Assche (2010)

12 Chinese processing trade data PRC processing trade regime Duty exemptions for imported inputs used in exports This is inherently GVC trade so permits comparison with normal trade outside processing trade regime Value added in China is very low Processing trade growth has been fastest in the large durable goods sectors of machinery, electrical, and miscellaneous mfg

13 Specification and data challenges Standard trade model in dlogs, and with fixed effects Δ ln x rkt = α + fe rk + β 1 Δ lnrgdp kt + γ 1 Δ lnrer t + δ 1 Δ lnsup t + ε rkt r is processing/non-processing, k is industry, t is time sup is a supply proxy, total factory productivity growth versions with/without dynamics, alt. supply proxies we estimate variants with interaction terms for durable/ nondurable, processing/non-processing note rgdp varies by industry, while rer doesn t bec of data limits Model relating processing imports to processing exports Δ ln pm kt = α + fe k + βδ ln px kt + ε kt

14 Specification and data challenges Very short annual trade data sample Excludes data prior to the unification of the exchange rate system in 1994 We have access to annual data only No good price deflators We use US import price deflator as proxy Poor export price coverage precludes industry specific RERs An era of massive structural change in Chinese production and trade Previous (primarily aggregate) studies have found it very difficult to estimate stable PRC trade equations

15 Basic panel export equation All variables in dlogs Includes industry fixed effects and robust standard errors Dependent variable: exports Ceof Est Robust SE RGDP RGDP(-1) 1.39 ** RER RER(-1) ** 0.37 TFP TFP(-1) 0.01 *** *** 0.00

16 Panel export equation durable/nondurable All variables in dlogs Includes industry fixed effects and robust standard errors Dependent variable: exports Ceof Est Robust SE RGDP RGDP(-1) 1.09 ** RGDP*durable RGDP(-1)*durable 2.66 *** * 0.44 RER RER(-1) *** 0.44 RER*durable RER(-1)*durable TFP terms not shown

17 Panel export equation processing/nonprocessing All variables in dlogs Includes industry fixed effects and robust standard errors Dependent variable: exports Ceof Est Robust SE RGDP RGDP(-1) 1.55 ** RGDP*processing RGDP(-1)*processing RER RER(-1) *** 0.33 RER*processing RER(-1)*processing ** *** 0.47 TFP terms not shown

18 Bullwhip Effect regressions All variables in dlogs Includes industry fixed effects and robust standard errors Dependent variable: Processing Imports Coef Est Robust SE Coef Est Robust SE Processing Exports 0.91 *** *** 0.12 Processing Exports(-1) ProcExports*volatility ProcExports*volatility(-1) ProcExports*durable ProcExports*durable(-1) 0.25 *

19 Conclusions Conclusions Contrary to some expectations, we do not find evidence that GVCs inherently increase exposure to external shocks Instead, our findings suggest concentration in durable goods is the important factor Value of our approach is that it identifies GVC trade Disadvantages include very short sample period Implications? Growth of durable goods trade, facilitated by GVC development, has likely intensified interdependence Has this process peaked?