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Essays on Trade and Production Sharing

  • Author(s): Noguera, Guillermo Marcelo
  • Advisor(s): Gourinchas, Pierre-Olivier
  • et al.

This dissertation consists of three essays on trade and production sharing.

Chapter 1 analyzes the value added content of bilateral trade. In this chapter, Robert Johnson and I combine input-output and bilateral trade data to compute the ratio of value added to gross exports (VAX ratio), which is a measure of the intensity of production sharing. We find that across countries, export composition drives VAX ratios, with exporters of Manufactures having lower ratios. Across sectors, the VAX ratio for Manufactures is low relative to 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 find 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.

Chapter 2 studies how international trade flows respond to changes in trade costs. An extensive literature uses gravity equations to estimate the trade cost elasticity of trade flows. This chapter shows that the standard estimation of the gravity equation is biased because it ignores that a large share of international trade is in intermediate rather than final goods. Final and intermediate goods trade flows respond differently to changes in trade costs and not distinguishing between them leads to an underestimation of the overall trade cost elasticity in absolute value of 39% on average. The magnitude of the bias is strongly correlated with the degree of production sharing: countries whose imports contain relatively low value added from the direct exporter have relatively large negative biases; that is, their true trade cost elasticity is significantly larger in absolute value than when not accounting for production sharing.

Chapter 3 explores the evolution and determinants of production sharing patterns and trade costs over 1995-2005. Following the methodology from Chapter 1, I construct a panel dataset of annual bilateral value added flows for 39 countries and a rest of the world region and eight sectors. I show that the VAX ratio declined by 8% on average between 1995 and 2005, and that this is mostly due to an increase in production sharing in the manufacturing sector. I derive micro-founded, comprehensive measures of bilateral trade costs for final and intermediate goods and show that both types of trade costs decreased steadily over the period, with intermediate goods trade costs being significantly lower than final goods trade costs. I also find evidence that intermediate goods trade costs are less responsive to free trade agreements and tariffs, suggesting that hard-to-measure trade costs such as communication and coordination costs are an important determinant.

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