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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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Overview Argument Research design Results Robustness Conclusion
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).
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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.
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
Research design
Average tariff levels over time, by major trading entity.
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Australia China Canada
EC Korea USA
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12
tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20
Ave
rage
tarif
fs
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Overview Argument Research design Results Robustness Conclusion
Research design
Average tariff levels over time, by economic sector.
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Life animals Chemicals Plastics
Textiles Machinery Vehicles
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3
6
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0
3
6
9
tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20
Ave
rage
tarif
fs
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Overview Argument Research design Results Robustness Conclusion
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
tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20 tmin1 t5 t10 t15 t20
Per
cent
age
of ta
riff l
ines
that
are
0
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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.
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
The additive results
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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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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.
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
Many thanks!
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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Overview Argument Research design Results Robustness Conclusion
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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Overview Argument Research design Results Robustness Conclusion
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.
IIT, Global Supply Chains and Trade Policy Baccini, Dur & Elsig
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