Shock Propagation in Dual-Circulation Production Networks: Characteristics and Simulation

This article constructs a dual-circulation production network framework on the basis of integrating inter-country and China’s multi-regional input-output tables, identifies the propagation and attenuation of sectoral shocks in dual-circulation production networks, and measures the effects of US-China trade frictions on the networks. The research finds that: (1) The asymmetry between domestic- and international-circulation production networks has increased, and with a few sectors becoming key sectors to dual-circulation production networks, sectoral shocks grow increasingly critical for aggregate volatility. (2) Based on the above analytical framework, the global extraction method (GEM) is adopted to simulate the GDP losses in scenarios of China-US i ndustry-wide chain interruptions, certain sectoral frictions, and supply-side and demand-side chain interruptions. The simulation finds that increasing the domestic substitution rate will reduce the value losses caused by China-US chain interruptions, which is applied for both countries. However, even if full substitution can be achieved, the value losses cannot be avoided completely in the China-US decoupling. Whether it is the demand-side chain interruptions plus insufficient market substitution in China, or the supply-side chain interruptions plus insufficient supply substitution in the US, will cause great losses to their economy.