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International Trade Linkages and Foreign Shocks

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Conference Room 6
Hosted By: International Economics and Finance Society
  • Chair: Sergey Nigai, University of Colorado-Boulder and CESifo

Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts

Emmanuel Dhyne
,
National Bank of Belgium
Ayumu Ken Kikkawa
,
University of British Columbia-Sauder
Toshiaki Komatsu
,
University of Chicago
Magne Mogstad
,
University of Chicago and NBER
Felix Tintelnot
,
University of Chicago and NBER

Abstract

We quantify and explain the firm responses and worker impacts of foreign demand shocks to domestic production networks. To capture that firms can be indirectly exposed to such shocks by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. Our estimates of firm responses suggest that Belgian firms pass on a large share of a foreign demand shock to their domestic suppliers, face upward-sloping labor supply curves, and have sizable fixed overhead costs in labor. Motivated and guided by these findings, we develop and estimate an equilibrium model that allows us to study how idiosyncratic and aggregate changes in foreign demand propagate through a small open economy and affect firms and workers. Our results suggest that the way the labor market is typically modeled in existing research on foreign demand shocks with no fixed costs and perfectly elastic labor supply—would grossly understate the decline in real wages due to an increase in foreign tariffs.

Trade Policy and Exporters’ Resilience: Evidence from Indonesia

Massimiliano Cali
,
World Bank
Simon Caicedo Graciano
,
World Bank
Devaki Ghose
,
World Bank
Angella Faith Montfaucon
,
World Bank
Michele Ruta
,
World Bank

Abstract

How does trade policy affect exporters’ ability to respond to foreign demand shocks? Using new time-varying data on tariffs and non-tariff measures (NTMs) from Indonesia, this paper shows that in response to a depreciation of the yuan which makes Chinese exports more competitive, firms that face NTMs on their inputs see a much larger drop in their export values compared to firms that do not face any NTMs. The magnitude of this effect depends on the type of NTM and on firms’ characteristics such as their participation in global value chains, size, and product quality.

Import Competition, Trade Credit and Financial Frictions in General Equilibrium

Federico Esposito
,
Tufts University
Fadi Hassan
,
Bank of Italy, CEPR and CEP-LSE

Abstract

We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints.

International Transmission of Inequality through Trade

Sergey Nigai
,
University of Colorado-Boulder and CESifo

Abstract

I quantify the extent of international transmission of inequality through trade linkages. Using firm-level and aggregate data, I find that (i) higher inequality in export markets increases the dispersion of export profits such that (ii) exporting to more unequal countries increases domestic inequality and (iii) trade magnifies the international transmission of domestic inequality shocks. I develop a model that rationalizes these empirical findings. The model relies on a novel theory of consumer targeting in which firms target and serve specific consumer segments in each market. Inequality in export markets shapes the distribution of firms' profits and, therefore, the incomes of individuals linked to them, in turn widening domestic inequality. I calibrate the model and show that consumer targeting and inequality transmission explain a sizable share of the observed levels of the Gini coefficients and income shares of the top 1%. Inequality transmission through trade significantly magnifies the effects of globalization on income inequality.

Discussant(s)
Trang Hoang
,
Federal Reserve Board
Tibor Besedeš
,
Georgia Institute of Technology
Tim Schmidt-Eisenlohr
,
Federal Reserve Board and CESifo
Piyush Panigrahi
,
Johns Hopkins University and CESIfo
JEL Classifications
  • F1 - Trade
  • F6 - Economic Impacts of Globalization