Rue de la Banque no. 70: Do firms benefit equally from trade in inputs?

As intermediate inputs account for two-thirds of world trade, understanding the mechanisms driving this specific component of global trade and their implications in terms of welfare is crucial. The authors show that micro-data for foreign input spending patterns at the firm-level is key to quantifying the welfare consequence of input trade, as trade in intermediates allows firms to reduce their costs of production thereby benefiting the aggregate economy. In an application of this methodology to the French economy, it appears that the gains from input trade at the firm level are highly skewed: while the median French importer would see its unit costs increase by 11.2% if it lost access to international input markets, the 10% most affected firms would experience unit cost increases larger than 85%.
Overall, input trade reduces the prices of manufacturing products by 27% and the aggregate price index by 9%.

Understanding the links between trade, aggregate productivity and eventually welfare is one of the major challenges in international economics. Because intermediate inputs account for about two-thirds of the volume of world trade, understanding the mechanisms underlying firms’ import strategies and their implications for the gains from trade is particularly important.

Several articles have shown that improved access to foreign inputs has had a positive impact on firms’ productivity in different countries such as Hungary (Halpern et al., 2015) or India (Goldberg et al., 2010). An important second step in this research agenda is to investigate the underlying mechanisms through which imports increase productivity. To evaluate the welfare and redistributive implications of trade policies, we need to understand which firms gain most, through what channels and how the effects depend on the economic environment. In this issue of Rue de la Banque, we present the methodology that we have designed in recent research (Blaum et al., 2018a and 2018b) to answer these questions.

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Rue de la Banque no. 70: Do firms benefit equally from trade in inputs?
  • Published on 10/24/2018
  • 5 pages
  • EN
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Updated on: 10/25/2018 13:59