DP9870 A theory of trade in a global production network

Author(s): Maarten Bosker, Bastian Westbrock
Publication Date: March 2014
Date Revised: September 2016
Keyword(s): global supply chains, international trade, network effects
JEL(s): C67, F12, F63
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9870

This paper argues that the determinants of the welfare gains from trade have fundamentally changed with the emergence of a global production network. Towards this end, we develop a novel counterfactual approach to decompose the welfare effects of any small trade cost variation in any general equilibrium model of international trade. Our findings stress a unique feature of supply chain trade: the gains from a further integration of the global production network are not so much determined by a country's own local conditions or those of its direct trade partners. Instead, the economic prospects of a country depend on its connections to important trade intermediaries, countries that provide indirect access to the demand and supply of many other nations. We complement our theoretical findings by an easy-to-implement empirical strategy and identify each country's key intermediaries.