wiiw - Intra-Industry Trade, Global Supply Chains and the Political … · N=525,632 Proportional cut Time to zero WTO Democracy GDP GDPpc_B GDPpc_A Imports MFN IIT missing IIT Intermediate

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Overview Argument Research design Results Robustness Conclusion

Intra-Industry Trade, Global Supply Chains andthe Political Economy of Preferential Trade

Liberalization

Leonardo Baccini, Andreas Dur and Manfred Elsig

McGill, Salzburg, Bern

Vienna, 22 September 2015

IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig

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Motivation and research questions

Proliferation of preferential trade agreements (PTAs)

merged$Var1

mer

ged$

cum

1950 1960 1970 1980 1990 2000 2010Year

0

100

200

300

400

Cum

ulat

ive

num

ber

of P

TAs

in fo

rce

0

10

20

30

40A

gree

men

ts s

igne

d by

yea

r

Data from www.designoftradeagreements.org (Dur et al. 2014).


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Motivation and research questions

What we want to know:• Who manages to shape these agreements?• Who wins and who loses?• Particularly relevant given the TTIP and TPP negotiations


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Our contribution

Concrete research question:• Which role do intra-industry trade (IIT) and global supply

chains (GSCs) play in the political economy of PTAs?- IIT has been increasing for many years according to most

measures- Trade in intermediates accounts for two-thirds of imports for

most OECD countries• We argue that the two developments interact in shaping the

political economy of PTASs and use an original dataset ontariff concessions in PTAs to test this argument


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Argument

Difference between finished goods and intermediates:• Firms increasingly offshore parts of the production process

(vertical specialization)• Creates trade in intermediates that can take place within a

firm or at arm’s length (“contract manufacturers”)• Trade barriers on intermediate goods become a major obstacle

for firms that import them (cumulative effects)• Companies involved in GSCs can be expected to push for the

liberalization of trade in intermediate goods• As we do not see a similar constituency demand the

liberalization of finished goods, the political economy of tradeliberalization differs for finished goods and intermediates


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Argument

Conventional argument about IIT applies for finished goods:• If IIT is low, the adjustment costs for import-competitors are

high; they strongly oppose liberalization• If IIT is high, import-competitors are less concerned (Helpman

1981; Krugman 1981; Lipson 1982; Milner 1997; Manger2015)

• An increase in IIT increases net demand for tradeliberalization of finished goods


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Argument

This argument should not hold for intermediates:• Demand for liberalization from downstream industries should

be higher if IIT is low than if IIT is high- If IIT is low, downstream industries tend to be unified in their

support of trade liberalization- If IIT is high, downstream industries will be divided (those

sourcing abroad benefit from trade liberalization; thosesourcing domestically are either indifferent or support tariffse.g. because a tariff reduction would benefit their competitors)

- Domestic producers of intermediates are either concernedabout direct competition (low IIT) or about competitivepressure on their downstream users (high IIT)

• An increase in IIT reduces net demand for trade liberalization


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Argument

From trade policy demands to trade policy supply:• Assumption that decision-makers follow societal demands

when designing trade agreements• This can be a result of lobbying or because decision-makers

try to preempt lobbying

Hypothesis:Whereas more IIT facilitates the liberalization of finished goods,this is not the case for intermediate goods.


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Research design

Our data:• We use tariff concessions in PTAs to test our argument• Tariff liberalization remains a key element of PTAs• Some tariffs are liberalized immediately, others are liberalized

after a few years, still others are completely exempted• PTAs ideal testing ground because IIT is dyadic


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Research design

Our data• Original dataset containing the tariff concessions exchanged in

61 PTAs at the 6 digit HS level- The DESTA project (Dur et al. 2014)- Australia, Canada, China, European Union, Japan, South

Korea and the United States- 1995 to 2014

• 158 tariff schedules with around 5,000 tariff lines each- WITS alone not sufficient! (and WITS coverage considerably

worse than ours)• Around 800,000 observations


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Research design

Average tariff levels over time, by major trading entity.

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Australia China Canada

EC Korea USA

0

3

6

9

12

0

3

6

9

12

tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20

Ave

rage

tarif

fs


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Research design

Average tariff levels over time, by economic sector.

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Life animals Chemicals Plastics

Textiles Machinery Vehicles

0

3

6

9

0

3

6

9


Ave

rage

tarif

fs


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Research design

Share of tariff lines with zero duties.

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All China EC

Japan Korea USA

25

50

75

100

25

50

75

100


Per

cent

age

of ta

riff l

ines

that

are

0


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Dependent variables

First-year cut as % of tariff ratetmin1: (tmin1 - t0)/tmin1

(Proportional cut)

0e+00

1e+05

2e+05

0 0.2 0.4 0.6 0.8 1First−year cut

Fre

quen

cy

Years needed for tariff to go tozero

(Time to zero)

0

5

10

15

0 5 10 15 20Length of transition period

Fre

quen

cy


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Estimation

• OLS regression (fractional regression as robustness check forfirst-year cut)

• Clustered standard errors at the HS6 level• We drop tariff lines that are zero at tmin1. In robustness

checks, we use a Heckman selection model to deal with theresulting selection effect.


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Predictors

Good type:• Final vs. intermediate and mixed (Francois and Pindyuk 2012

and Bekkers et al. 2012)

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ArmsArt objects

FootwearLife animals

Prepared foodVegetables

Miscellaneous manufacturedPrecious stones

TextilesLeather

ChemicalsOptical instruments

Articles of stoneFats

MachineryPlasticsVehicles

Base metalsMinerals

PaperWood

0 25 50 75 100Proportion of tariff lines that concern intermediates


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Predictors

Intra-industry trade:• Simultaneous imports

and exports of a good• Measured at the HS6

level• IIT missing to control

for missingobservations

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New ZealandChile

OmanMorocco

ChinaCosta_Rica

EgyptPanama

PeruPakistan

CambodiaTunisia

El_SalvadorGuatemala

MexicoJordan

MyanmarColombiaLebanon

HondurasNicaragua

IndiaIndonesia

CroatiaVietnam

JapanThailand

USATurkey

ECDominican_Republic

PhilippinesAustralia

SingaporeSouth_Africa

MalaysiaIsrael

SwitzerlandCanada

KoreaNorwayIceland

Laos

0.2 0.3 0.4Mean IIT by country


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Control variables

• Tariff level at tmin1• Imports• GDP per capita (countries A and B)• GDP (combined)• Democracy• WTO membership• In some models: fixed effects for country A, country B, PTA,

year and HS2 sector


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The additive results

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●N=516,954

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●N=525,632

Proportional cut Time to zero

WTO

Democracy

GDP

GDPpc_B

GDPpc_A

Imports

MFN

IIT missing

IIT

Intermediate good

0.00 0.05 0.10 0.15 0.20 −0.3 −0.2 −0.1 0.0Coefficient


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Testing the hypothesis

Finished

Intermediate

.55

.6.6

5.7

Line

ar P

redi

ctio

n

0 .2 .4 .6 .8 1IIT

Proportional cut

05

1015

20P

erce

nt

Finished

Intermediate

.75

.8.8

5.9

.95

1Li

near

Pre

dict

ion

0 .2 .4 .6 .8 1IIT

Time to zero

05

1015

20P

erce

nt


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Testing the hypothesis

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New ZealandTunisiaOman

IcelandEgypt

IndonesiaMexico

PhilippinesIsrael

CanadaSouth Africa

CambodiaChile

ECPakistan

JapanThailand

TurkeyVietnamAustraliaMalaysia

LaosMorocco

El SalvadorCroatia

Dominican RepublicUSA

GuatemalaPanama

PeruJordan

ColombiaChinaKorea

HondurasNicaragua

Costa Rica

−0.5 0.0 0.5Coefficient (Intermediate good x IIT)


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Differentiated good as proxy for IIT

• Homogeneous versus differentiated goods (Rauch 1999)

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FatsLife animals

MineralsVegetables

Prepared foodChemicals

WoodPlastics

PaperLeather

Base metalsTextiles

Precious stonesMachinery

ArmsArt objects

Articles of stoneFootwear

Miscellaneous manufacturedOptical instruments

Vehicles

40 60 80 100Proportion of tariff lines that concern differentiated goods


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Differentiated good as proxy for IIT

Finished

Intermediate

.5.5

5.6

.65

Line

ar P

redi

ctio

n

0 1Differentiated good

Proportional cut

Finished

Intermediate

.7.8

.91

1.1

Line

ar P

redi

ctio

n

0 1Differentiated good

Time to zero


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Trade elasticity as proxy for IIT• Trade elasticity captures the extent to which prices react to

imports• Low elasticity is an indication of high IIT• Import demand elasticities by country at the 3 digit level from

Broda et al. 2006

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Mean=1.39

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Mean=0.94

China USA

ArmsOptical instruments

Articles of stoneFootwear

VegetablesVehiclesLeather

WoodMinerals

ChemicalsLife animals

MachineryPlastics

FatsTextiles

Prepared foodBase metals

PaperMiscellaneous manufactured

Precious stones

0.5 1.0 1.5 2.0 2.5 0.5 1.0 1.5 2.0 2.5Mean trade elasticity by section


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Trade elasticity as proxy for IIT

Finished

Intermediate

.6.6

5.7

.75

.8.8

5Li

near

Pre

dict

ion

80 1 2 3 4 5 6 7lnTradeElasticity

Proportional cut

02

46

810

Per

cent

Finished

Intermediate

.2.4

.6.8

1Li

near

Pre

dict

ion

80 1 2 3 4 5 6 7lnTradeElasticity

Time to zero

02

46

810

Per

cent


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Is the effect driven by primary commodities?

Finished

Intermediate

.6.6

5.7

.75

Line

ar P

redi

ctio

n

0 .2 .4 .6 .8 1IIT

Proportional cut

05

1015

20P

erce

ntFinished

Intermediate

.65

.7.7

5.8

.85

.9Li

near

Pre

dict

ion

0 .2 .4 .6 .8 1IIT

Time to zero

05

1015

20P

erce

nt

Data for primary commodity from Basu 2011.


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Conclusion

Key findings• Neither IIT nor GSCs unambiguously facilitate trade

liberalization; rather:• For finished goods, IIT facilitates trade liberalization; for

intermediates, it does not• At low levels of IIT, GSCs facilitate trade liberalization; at high

levels, they do not• The most productive companies that source differentiated

intermediates abroad do not see their preferences reflected intrade policy

• Rather, the potential losers seem to be key in understandingtariff concessions in PTAs


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Many thanks!


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Bibliography

Basu, Sudip R. 2011. “Retooling Trade Policy in Developing Countries: DoesTechnology Intensity of Exports Matter for GDP per Capita.” PolicyIssues in International Trade and Commodities UNCTAD/ITCD/TAB.

Bekkers, Eddy, Joseph Francois, and Miriam Manchin. 2012. “Import Prices,Income, and Inequality.” European Economic Review 56(4): 848–69.

Broda, Christian, Joshua Greenfield, and David Weinstein. 2006. “FromGroundnuts to Globalization: A Structural Estimate of Trade andGrowth.” NBER Working Paper 12512.

Dur, Andreas, Leonardo Baccini, and Manfred Elsig. 2014. “The Design ofInternational Trade Agreements: Introducing a New Dataset.” Review ofInternational Organizations 9(3): 353–75.

Helpman, Elhanan. 1981. “International Trade in the Presence of ProductDifferentiation, Economies of Scale and Monopolistic Competition: AChamberlin-Heckscher-Ohlin Approach.” Journal of InternationalEconomics 11(3): 305–40.


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Bibliography

Krugman, Paul R. 1981. “Intraindustry Specialization and the Gains fromTrade.” Journal of Political Economy 89(5): 959–73.

Lipson, Charles. 1982. “The Transformation of Trade: The Sources and Effectsof Regime Change.” International Organization 36(2): 417–55.

Manger, Mark. 2015. “PTA Design, Tariffs and Intra-Industry Trade.” In TradeCooperation: The Purpose, Design and Effects of Preferential TradeAgreements, eds. Andreas Dur and Manfred Elsig. Cambridge:Cambridge University Press, 195–217.

Milner, Helen V. 1997. “Industries, Governments, and Regional Trade Blocs.”In The Political Economy of Regionalism, eds. Edward D. Mansfieldand Helen V. Milner. New York: Columbia University Press, 77–106.

Rauch, James E. 1999. “Networks versus Markets in International Trade.”Journal of International Economics 48(1): 7–35.


Documents

wiiw - Intra-Industry Trade, Global Supply Chains and the Political … · N=525,632 Proportional cut Time to zero WTO Democracy GDP GDPpc_B GDPpc_A Imports MFN IIT missing IIT Intermediate