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Trade and Domestic Production Networks

Author

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  • Felix Tintelnot

    () (University of Chicago, USA)

  • Ken Kikkawa

    () (UBC Saunder School of Business, Canada)

  • Magne Mogstad

    () (University of Chicago, USA)

  • Emannuel Dhyne

    () (Economics and Research Department, National Bank of Belgium)

Abstract

We use Belgian data with information on domestic firm-to-?rm sales and foreign trade transactions to study how international trade affects ?rm efficiency and real wages. The data allow us to accurately construct the domestic production network of the Belgian economy, revealing several new empirical facts about firms’ indirect exposure to foreign trade through their domestic suppliers and buyers. We use this data to develop and estimate models of domestic production networks and international trade. We ?rst consider a model of trade with an exogenous network structure, which gives analytical solutions for the effects of a change in the price of foreign goods on ?rms’ production costs and real wages. To examine how gains-from-trade calculations change if buyer-supplier links are allowed to form or break in response to changes in the price of foreign goods, we next develop a model of trade with endogenous network formation. We take both models to the data and compare the empirical results to those we obtain using existing approaches. This comparison highlights the relevance of data on and modeling of domestic production networks in studies of international trade.

Suggested Citation

  • Felix Tintelnot & Ken Kikkawa & Magne Mogstad & Emannuel Dhyne, 2018. "Trade and Domestic Production Networks," Working Paper Research 344, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201809-344
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    Cited by:

    1. Christopher Hansman & Jonas Hjort & Gianmarco León-Ciliotta & Matthieu Teachout, 2020. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3570-3625.
    2. Kun Jiang & Wolfgang Keller & Larry D. Qiu & William Ridley, 2018. "International Joint Ventures and Internal vs. External Technology Transfer: Evidence from China," CESifo Working Paper Series 7065, CESifo.
    3. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
    4. Jean Imbs & Laurent L. Pauwels, 2020. "High Order Openness," Working Papers 20200047, New York University Abu Dhabi, Department of Social Science, revised Jun 2020.
    5. Daron Acemoglu & Pablo D. Azar, 2020. "Endogenous Production Networks," Econometrica, Econometric Society, vol. 88(1), pages 33-82, January.
    6. Emmanuel Dhyne & Glenn Magerman & Ayumu Ken kikkawa, 2019. "Imperfect Competition in Firm-to-Firm Trade," Working Papers ECARES 2019-05, ULB -- Universite Libre de Bruxelles.
    7. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.
    8. Akgündüz, Yusuf Emre & Torun, Huzeyfe, 2020. "Two and a half million Syrian refugees, tasks and capital intensity," Journal of Development Economics, Elsevier, vol. 145(C).
    9. Cynthia Kinnan & Krislert Samphantharak & Robert Townsend & Diego Vera-Cossio, 2019. "Insurance and Propagation in Village Networks," PIER Discussion Papers 115, Puey Ungphakorn Institute for Economic Research, revised Sep 2019.
    10. Esposito, Federico, 2019. "Demand Risk and Diversification through Trade," MPRA Paper 99875, University Library of Munich, Germany.
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    12. Kirill Borusyak & Xavier Jaravel, 2018. "The Distributional Effects of Trade: Theory and Evidence from the United States," 2018 Meeting Papers 284, Society for Economic Dynamics.
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    17. Georgiadis, Georgios & Gräb, Johannes & Khalil, Makram, 2019. "Global value chain participation and exchange rate pass-through," Working Paper Series 2327, European Central Bank.
    18. LI Zhigang & WEI Shang-Jin & ZHANG Hongyong, 2018. "Production Chains, Exchange Rate Shocks, and Firm Performance," Discussion papers 18058, Research Institute of Economy, Trade and Industry (RIETI).
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    More about this item

    Keywords

    Production Networks; Network formation; Indirect imports and exports; Gains from trade;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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