Supply shocks in China hit the world economy via global supply chains

Global supply chains have become increasingly important in international trade over the past decade. Nevertheless, it remains di cult to quantify the role of supply-chain trade in transmitting and amplifying shocks, given the challenge of identifying and tracing the exogenous shocks across economies. This paper argues that the lockdown of Hubei province in China due to the Coronavirus (COVID-19) outbreak provides a natural experiment to study the importance of China's role in global value chains. Since the lockdown started during the Lunar New Year, Hubei's migrant workers who went home could not return to workplaces in other provinces, resulting in a massive labor supply shock. I feed the supply shock through a Ricardian model with intermediate goods and sectoral linkages to study trade and welfare e ects across several economies. While welfare in China is the most strongly a ected, the shock also has sizeable implications for the US and the UK. However, close neighbors such as South Korea and Japan gain from the shock. There are large variations regarding the sectoral contributions to the aggregate welfare changes. The model also performs well in predicting bilateral export changes.