Trade policies and Global Value Chains Flashcards
What are the categories of international trade defined by the stage of processing?
International trade in goods can be differentiated by stage of processing, including primary goods, intermediate goods, consumer goods and capital goods.
What is the domino effect?
Trade costs from tariffs are magnified in global supply chains called the domino effect.
What is cumulative tariff?
Cumulative tariff is the cost of all tariffs incurred in a production process along the global value chain.
It consists of two parts, namely a direct tariff and an indirect tariff.
Cumulative tariff depends on the tariffs themselves imposed by a country on imports of goods from other countries, as well as the supply chain interdependency (share of the corresponding intermediate input needed to produce one unit)
What is an Indirect tariff burden?
Indirect tariff burden is the extra tariff burden on third countries caused by tariff adding between two trading partners
What are some strategies to deal with GVC disruptions?
switching production locations, end markets, and/or suppliers, or economic upgrading value chain activities.
Explain a switching strategy
A switching strategy will influence the geographic configuration of the GVC.
It can be switch of production, suppliers, or end markets.
Production implies moving production to countries unaffected by trade restrictions, moving production to lower-cost countries, or tariff-jumping FDI, reshoring.
Supplier switching could be to find alternative suppliers
End market switching means to sell in alternative countries.
Explain an economic upgrading strategy
Economic upgrading will influence the organisational configuration of the GVC.
It implies capturing more value by improving processes or products or moving into higher value-added segments in GVCs. This will increase the profit margin. For instance, moving from assembling imported inputs to production of components.
Are third parties impacted by trade wars?
Yes, third countries are affected by trade wars between two countries, because the tariff hikes increase cumulative tariffs for other countries and hurt trade partners further downstream in global supply chains. This is especially because countries are connected through global value chains.
For instance: Higher US import tariffs penalize many non-Chinese firms that use China as a sourcing location where imported inputs are assembled for export to the US. Additionally, higher tariffs on imported intermediate goods from China can hurt US domestic firms using these inputs.
