The World Trade Organization forecasts that the volume of global trade will in 2009 exhibit its biggest contraction since World War II. This large drop in international trade is generating signi…cant attention and concern. Given the severity of the current global recession, is international trade behaving as we would expect? Or alternatively, is international trade shrinking due to factors unique to cross border transactions per se? This paper merges a global input-output model with a gravity trade structure in order to quantitatively answer these questions. The framework distinguishes a drop in trade resulting from a decline in the tradable good sector from a drop resulting from worsening trade frictions. We demonstrate empirically that given the geographic distribution and size of the decline in demand for manufactures, the overall decline in trade ‡ows of manufactured goods is in fact larger than would be expected, though the scale of this deviation does not stand out as historically exceptional. We use the model to solve numerically several counterfactual scenarios which give a quantitative sense for the relative importance of trade frictions and other shocks in the current recession.

This article develops an elementary theory of global supply chains. We consider a world economy with an arbitrary number of countries, one factor of production, a continuum of intermediate goods and one final good. Production of the final good is sequential and subject to mistakes. In the unique free trade equilibrium, countries with lower probabilities of making mistakes at all stages specialize in later stages of production. Using this simple theoretical framework, we offer a first look at how vertical specialization shapes the interdependence of nations.

The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the International Monetary Fund. During the Great Recession of 2008-2009, real world trade fell by roughly four times the decline in real world GDP. 1 A common, but somewhat controversial, view is that crossborder vertical linkages – international trade in intermediate goods – played a key role in amplifying the decline in trade. The purpose of this paper is to provide systematic evidence ontheimportanceoftheselinkages. TheframeworkweusedrawsfromRobertC.Johnson and Guillermo Noguera (2010) and Rudolfs Bems, Johnson and Kei-Mu Yi (2010); it is a global input-output table that links demand to production through bilateral, sectoral trade in intermediate and final goods. With this framework, we perform two exercises. In our first exercise, we compute the fall in final goods trade and in intermediate goods trade that arises from the actual decline in final demand that occurred between 2008Q1 and 2009Q1. Surprisingly, we find that the fall in finalgoodstradewasmorethantwiceaslarge as the fall in intermediate goods trade. That is, the presence of intermediate goods helped

This paper introduces a new methodology for the estimation of income trade elasticities based on an import intensity-adjusted measure of aggregate demand. It provides an empirical illustration of this new approach for a panel of 18 OECD countries, paying particular attention to the 2008-09 Great Trade Collapse, which standard empirical trade models fail to account for. In this paper, we argue that the composition of demand plays a key role in the collapse of trade during crises because of a relatively bigger fall in the most import-intensive categories of expenditure (especially investment, but also private consumption), which has a large downward impact on the quantity of imports from the rest of the world. In addition, the fragmentation of production implies high import content of exports and, in turn, strongly synchronized trade ‡uctuations across countries. We provide evidence in favor of these factors based on the analysis of the new OECD input-output tables and building on a stylized theoretical model. Importantly, we show that our new intensityweighted measure of demand outperforms alternative measures, during crises but also in normal

Ostapik and Mohan Anand provided excellent research assistance. The views expressed in this paper are those of the authors and are not necessarily reflective of views of the Federal Reserve Bank of Philadelphia South Korea’s growth miracle has been well documented. A large set of institutional and policy reforms in the early 1960s is thought to have contributed to the country’s extraordinary performance. In this paper, we assess the importance of one key set of policies, the trade policy reforms in Korea, as well as the concurrent GATT tariff reductions. We develop a model of neoclassical growth and trade that highlights two forces by which lower trade barriers can lead to increased per worker GDP: comparative advantage and specialization, and capital accumulation. We calibrate the model and simulate the effects of three sets of tariff reductions that occurred between the early 1962 and 1995. Our main finding is that the model can explain up to 32 percent of South Korea’s catch-up to the G7 countries in output per worker in the manufacturing sector. We find that the effects of the tariff reductions taken together are about twice as large as the sum of each reduction applied individually.

This paper uses a global input-output framework to quantify U.S. and EU demand spillovers and the elasticity of world trade to GDP during the global recession of 2008-2009. Cross-border intermediate goods linkages have implications for the transmission of shocks and the relationship between demand, trade, and production across countries. We find that 20-30 % of the decline in U.S. and EU final demand was borne by foreign countries, with NAFTA

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

The standard international real business cycle model struggles to replicate the strong empirical correlation between bilateral trade and output comovement. This paper explores whether trade in intermediate inputs resolves this puzzle. I integrate input trade into a many country, multi-sector model, and calibrate the model to match bilateral input-output linkages. I find that input trade fails to resolve the aggregate puzzle. The model fails in large part because it cannot match the observed correlation of services output across countries. In contrast, the model matches observed correlations of goods output well. Further, independent shocks across countries explain one-quarter of the trade-comovement relationship for gross output of goods. However, because independent shocks are transmitted through input linkages, they synchronize gross output, not value added. Using simulated data, I argue that caution is needed in interpreting trade-comovement regressions that include proxies for vertical linkages.

The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. Our findings indicate that the rise of offshoring is likely to complicate the task of trade agreements for two reasons: first, the mechanism by which countries can shift the costs of intervention on to their trading partners is more complicated in the presence of offshoring and extends to a wider set of policies than is the case when offshoring is not present, and this implies that the agreements themselves must extend to a wider set of policies as well; and second, the underlying problem that a trade agreement must address in the presence of offshoring varies with the political preferences of member governments. As a consequence, the growing prevalence of offshoring is likely to make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules – such as market access, reciprocity and non-discrimination – to help them solve their trade-related problems.

and Denver (ASSA). The views expressed herein are those of the authors and do not necessarily reflect