VoxEU Column Global crisis International trade

Global value chains are not all born identical: Policymakers beware

Trade in today’s global economy is not a simple game of exchange-rate muddling. The complex web of global value chains ensures that products marked “Made in China” are often in fact made all over the world. This column looks at firm-level data from French firms between 2007 and 2009 and explores how their structure affects their behaviour, with insights for policymakers the world over.

Global value chains are increasingly important in international trade. The breakup of goods and services production between different companies often operating in different parts of the world (creating a ‘global’ value chain) can be seen all around us. (Take, for instance, the omnipresent iPhone from Apple; see Xing (2011) on this site).

The emerging significance of global value chains is recognised by the rising trade in intermediate inputs that today represents a share of between 56% and 73% of overall trade flows in goods and services for developed economies (Miroudot et al 2009). The implications of such developments have recently (and finally) been at the centre of attention of both researchers and policymakers. One of the most popular issues has been the implied international distribution of labour and the welfare impact that global value chains might entail across interested countries (see again Xing 2011).

Moreover, the existence of global value chains has been identified as one of the most likely aggravating factors for the "Great Trade Collapse", which took place following the financial turmoil of late 2008 (see Baldwin 2009). A possible explanation for such a role is as follows.

Along the supply chain, uncertainty with respect to future changes in demand tends to be higher the more the individual participating firm finds itself in the upstream part of the chain (that is, the closer they are to the end consumer). As a result – and as shown by empirical evidence for the US (Alessandria et al 2011) – upstream participants to a supply chain tend to shelter themselves by holding higher inventories as buffers. The result is that the impacts of a shock on final demand are amplified for firms participating in supply chains which are located further from the final customer. In some ways it is like the waiting time of cars queuing at a traffic light: cars farther back in the queue will experience longer waiting times.

Such reasoning could provide an explanation for the remarkable increase in trade elasticities observed during the crisis. When global demand fell towards the end of 2008 – in parallel with heightened financial uncertainty – upstream firms were able to satisfy lower demand mostly by drawing from the large inventories they were holding. This however caused orders across global value chains to decrease substantially and more than proportionally with respect to the initial downstream drop in demand, but in line with lower future expectations.

Using microdata

In a recent ECB working paper (Altomonte et al 2012), we have re-examined the role of supply chains during the trade collapse using a novel firm-level dataset that matches monthly custom data with the global ownership structure of the corresponding trading company. The database encompasses over 62 million observations related to French firms for the period 2007–09 and allows us to study how trade patterns of individual firms are interrelated with their chosen organisational structure across countries. This includes, among other things, a variable assessing whether a trade flow takes place with countries in which the same firm has a related party; that is, another firm belonging to the same multinational group.

We obtain two main results of high policy relevance.

  • First of all, we can confirm the above-mentioned evidence that trade in intermediates overreacted to the final demand shock – we provide such evidence at a detailed firm level. This implies that inventory adjustment along value chains appears to be one major contributing factor to the great trade collapse.
  • The second important result is, however, that the international organisational modalities of firms along the supply chain matters. Indeed, the organisation matters substantially for the dynamics of the adjustment. On this result, we are going to devote the reminder of the article.

In simple terms, firms can trade with counterparts abroad under two different organisational forms: either by linking with their own affiliates located abroad, ie a ‘related party’ (or intra-group) strategy; or alternatively, by trading with a supplier external to the firm, an ‘arm’s length’ strategy. In our database, trade generated by multinationals operating in France is equally split across these two organisational forms.

Figure 1.Export developments and organisational modes

In Figure 1 we report monthly growth rates of export volumes by end-user categories (consumption goods, capital goods, and intermediates) distinguishing whether transactions are intra-group or arm’s length.

Consistent with our prior argument, trade originated by vertical integration (ie intra-group) drops faster at the onset of the crisis but also rebounds faster once the recovery begins. This is because the informational flow within the same multinational group is transmitted faster, thus allowing upstream participants in a supply chain to be less uncertain about the initial demand shock. We can also see in Figure 1 that this difference in trends is only for intermediate goods and not for consumption and capital goods. This suggests that total export flows are clearly driven by what happens to the trade in intermediates, thus confirming the hypothesis above that the great trade collapse was in large part the result of complex supply chains. Econometric estimations confirm the visual observation (note the same argument holds for imports).


Our findings imply that when assessing the effects of the increasing role of global value chains, we cannot disregard the specific organisational set-up of the same value chains. In the trade collapse episode, for instance, the speed of the trade drop and successive recovery was much quicker for firms connected by tighter cross-border organisational links (ie belonging to the same multinational group worldwide).

The policy implications of such a finding are self-evident. Policymakers can better identify possible industry areas that are more fragile (or resilient) to economic shocks and can start to devise more sophisticated ways to enhance competitiveness where the need arises.

Disclaimer: This column represents the views of the authors and does not necessarily reflect those of the ECB, the Banque de France or the Eurosystem.


Alessandria G, JP Kaboski, and V Midrigan (2011), “US Trade and Inventory Dynamics”, American Economic Review, 101(3):303-307.

Baldwin, R (ed.) (2009), The Great Trade Collapse: Causes, Consequences and Prospects, A VoxEU.org eBook, 27 November.

Altomonte, Carlo, Filippo Di Mauro, Gianmarco Ottaviano, Armando Rungi, and Vincent Vicard (2012), “Global Value Chains during the Great Trade Collapse: A Bullwhip Effect?”, forthcoming in the ECB Working Paper Series

Xing, Yuqing (2011), “How the iPhone widens the US trade deficit with China”, VoxEU.org, 10 April. 

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