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Reactions to Supply Chain Disruptions
Since the outbreak of the Covid-19 pandemic, the configuration of international supply chains has received increased public attention. Pandemic-related disruptions in production and transportation have led to questions about the reliability of international production networks. Moreover, the war in Ukraine and the associated sanctions against Russia have cast a new light on the geopolitical significance of economic interdependencies with autocratic regimes. How do firms react to these developments, and have they already adjusted their sourcing strategies? In this policy brief, we present the results from a representative survey of more than 4,000 firms in Germany, providing insights into how companies have responded to supply chain disruptions and which priorities they are setting for the future.
EU27 and the UK
The current COVID-19 crisis has shown the importance of supply chain diversification to mitigate the negative effect of unexpected supply shocks. The decision of the United Kingdom to leave the European Union poses additional challenges to foreign trade: Irrespective of the outcome of the Brexit negotiation, trade costs between the UK and the EU will increase as a response to Brexit and cause disruptions in trade relations. Trade shocks hitting one bilateral country pair might be more severe for goods that are highly dependent on few suppliers, as they cause an increase in costs and, in the worst case, supply chain disruptions. This report takes a detailed look at goods that are dependent on few suppliers and shows that few products are imported solely from the UK, representing a negligible share of imports.
German-Chinese Trade Relations
In recent decades, China has risen to become Germany's most important trading partner for international trade in goods. Has Germany become too dependent from trade with China? An analysis using direct and indirect value-added linkages along the supply chain shows that China plays an important, but by no means dominant role for Germany as a supplier or destination market. However, in a survey conducted by the ifo Institute, 46% of German firms in the manufacturing sector state that they currently depend on important intermediate inputs from China. Of those, almost half of the firms are planning to reduce imports from China in the future. The most frequently mentioned reasons for reducing imports from China are the desire to decrease dependencies and increase diversification, increased freight costs and disruptions in transportation, as well as political uncertainty. An analysis at the product level shows that the German economy depends on several critical industrial goods and raw materials from China.
Quality and Gravity in International Trade
This paper introduces quality innovations with endogenous sunk costs in a heterogeneous firm model of international trade and derives implications for the gravity equation. The model predicts that the effect of fixed costs on exports and on the share of exporters is lower in industries with a higher degree of vertical product differentiation. We use both aggregate trade data and firm-level data to estimate gravity equations and find strong evidence for a dampening effect of vertical differentiation on the fixed costs elasticity in international trade. Moreover, we estimate the parameters of our model and simulate the effects of a reduction in fixed trade barriers. Accounting for quality lowers the positive gains from trade and leads to more heterogeneous effects across industries compared to a trade model without quality investments. Consistent with our theory, vertical differentiation affects exports via sunk costs and the extensive margin, whereas the effect of variable trade costs does not depend on quality.
Corporate Taxes and Multi-product Exporters
This paper analyzes how exporters are affected by corporate tax reforms in destination markets. We introduce tax policy in a trade model of multi-product firms and show that producers face tougher competition in export markets with lower corporate tax rates. This competitive effect induces firms to reduce the number of exported products and to skew their export sales towards the better performing varieties. We estimate the effects of corporate taxes on trade dynamics by exploiting policy reforms in 45 destination countries of exports during the period 2005-2012. Our results provide strong support for competitive effects of corporate taxation.
