Abstract. Global value chains allow firms to not only trade in final goods, but to also conduct intermediate stages of production by processing imported inputs for re-exporting. This paper examines how financial constraints determine companies ’ position in global supply chains, and how this choice affects profitability. We exploit matched customs and balance-sheet data from China, where exports are classified as ordinary trade, import-and-assembly processing trade (processing firm pays for imported inputs), and pure-assembly processing trade (processing firm receives foreign inputs for free). We establish two main results. First, profits, profitability and value added fall as exporters orient sales from ordinary towards processing trade, and from import-and-assembly towards pure assembly. Second, less financially constrained firms perform more ordinary trade relative to processing trade, and more import-and-assembly relative to pure assembly. We rationalize these patterns with a model that incorporates credit constraints and imperfect contractibility in companies ’ export decisions. Our results imply that global production networks allow more firms in developing countries to share in the gains from trade- firms that could otherwise not transact internationally. However, limited access to capital restricts firms to low value-added stages of the supply chain and precludes them from pursuing more profitable opportunities. Financial frictions thus affect the organization of production across firm

Abstract. Global supply chains allow firms in developing countries to share in the gains from trade by conducting either ordinary or processing trade. This paper examines how financial constraints affect companies ’ choice of trade regime and ultimately profitability. We exploit matched customs and balance sheet data from China, where processing trade is further divided into import-and-assembly (processing firm pays for imported inputs) and pure assembly (processing firm receives imported inputs for free). We establish two main results. First, profits, profitability and value added fall as exporters orient sales from ordinary towards processing trade, and from import-and-assembly towards pure assembly. Second, less financially constrained firms perform more ordinary trade relative to processing trade, and more import-and-assembly relative to pure assembly. We rationalize these patterns with a model that incorporates credit constraints and imperfect contractibility in companies’ choice of trade regime. Our results imply that limited access to capital restricts firms to low valueadded stages of the supply chain and precludes them from pursuing more profitable opportunities. Financial frictions thus affect the organization of production across firm and country boundaries, and

Abstract. The fragmentation of production across borders allows firms to make and export final goods, or to perform only intermediate stages of production by processing imported inputs for re-exporting. We examine how financial frictions affect companies ’ choice between processing and ordinary trade – implicitly a choice of production technology and position in global supply chains – and how this decision affects performance. We exploit matched customs and balance-sheet data from China, where exports are classified as ordinary trade, import-and-assembly processing trade (processing firm sources and pays for imported inputs), and pure-assembly processing trade (processing firm receives foreign inputs for free). Value added, profits and profitability rise from pure assembly to processing with imports to ordinary trade. However, more profitable trade regimes require more working capital because they entail higher up-front costs. As a result, credit constraints induce firms to conduct more processing trade and pure assembly in particular, and preclude them from pursuing higher value-added, more profitable activities. Financial market imperfections thus impact the organization of production across firms and countries,

Based on a new dataset of world input-output tables we analyze the impact of foreign demand on

An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.org/wp T CESifo Working Paper No. 3584

Preliminary work in progress – comments welcome We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of international trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. We show that in response to an uncertainty shock firms optimally adjust their inventory policy by cutting their orders of foreign intermediates disproportionately strongly. In the aggregate, this response leads to a bigger contraction in international trade flows than in domestic economic activity. We confront the model with newlycompiled monthly aggregate U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and the cyclical behavior of international trade.

Note: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB This paper studies the great collapse in value added trade using a structural decomposition anal-ysis. We show that changes in vertical specialisation accounted for almost half of the great trade collapse, while the previous literature on gross trade has mainly focused on final expenditure, in-ventory adjustment and adverse credit supply conditions. The decline in international production sharing during the crisis may partially account for the observed decrease in global trade elasticities in recent years. Second, we find that the drop in the overall level of demand accounted for roughly a quarter of the decline in value added exports while just under one third was due to compositional changes in final demand. Finally, we demonstrate that the dichotomy between services and manu-facturing sectors observed in gross exports during the great trade collapse is not apparent in value added trade data.

Abstract. This paper examines why firms choose to service foreign markets via ordinary or processing trade and how this decision affects companies ’ profitability. Using matched customs and balance sheet data on Chinese exporters, we establish two empirical regularities. First, profits, profitability and value added systematically decrease as producers re-orient sales from ordinary towards processing trade, and from import-and-assembly towards pure assembly. Second, more productive firms and less liquidity constrained firms are more likely to pursue ordinary trade relative to processing exports. Within processing, more efficient and financially healthier manufacturers are more prone to undertake import-and-assembly than pure assembly. We rationalize these results with a model of international trade that incorporates credit constraints and imperfect contractibility in companies ’ choice over trade regimes.

an analySiS oF euroPean comPetitiveneSS

An analysis of European competitiveness