Integrating a Global Supply Chain Model With a Computable General Equilibrium Model

Global supply chain (GSC) trade results from decisions by firms producing final goods to allocate underlying tasks to dedicated facilities in different countries. These decisions create cross-border flows of products at various stages of completion. We demonstrate a divide-and-conquer approach to integrating GSC and computable general equilibrium (CGE) models: the models are solved separately and information is passed between them. A stylized integrated model suggests that by providing low-skilled jobs in developing countries, GSC trade accelerates the transfer of labour out of low-marginal-productivity agriculture in these countries into higher-marginal-productivity manufacturing. At the same time, GSC trade can leave high-income countries having to transfer considerable fractions of their workforce out of manufacturing and into services. After potentially expensive structural adjustment, high-income countries may be left in the long run with no more than a small equilibrium welfare gain or even a loss.