No island is an ‘island’ in the age of GVCs

Tommaso Aquilante, Marco Garofalo and Enrico Longoni

Over the past few decades production processes have become increasingly complex and integrated across national boundaries through so-called Global Value Chains (GVCs). With increasing trade tensions and uncertainty regarding future economic integration, the 400-year old words of the English poet John Donne captured in ‘No man is an island’ seem more topical than ever. In this BU we explore the UK’s position in GVCs showing that also no island is really an island! Using a sophisticated yet intuitive decomposition of UK’s trade flows we will show how GVCs matter for the UK economy, and in particular how they seem to matter more for what we export than imports.

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Imports and the composition of expenditure

Alex Tuckett

A fall in the real exchange rate can increase demand for domestic output in two main ways. The volume of exports – which become cheaper – is boosted. And goods and services that were previously imported can instead be supplied by domestic producers, which become more competitive as the price of imports rises. Economists call the second effect ‘import substitution’. Using data from Supply-Use tables can help us better understand the process of import substitution, in particular by examining how the composition of expenditure has influenced imports. Doing so shows that the import substitution effect of the 2008-09 depreciation was partly masked by other, co-incident factors.

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Trade: The benefits of foreign banks

Stijn Claessens and Neeltje van Horen.

Foreign banks can be important for trade. They can increase the availability of external finance for exporting firms and help overcome information asymmetries. Consistent with these channels, we show that firms in emerging markets tend to export more when foreign banks are present, especially when the parent bank is headquartered in the importing country. In advanced countries, where financial markets are more developed and information is more readily available, the presence of foreign banks does not play such a role. Financial globalization through the local presence of foreign banks can thus positively affect real integration.

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Bouncebackability of exports after the Great Trade Collapse of 2008/9

John Lewis and Selien De Schryder.

Did the dramatic fall in global trade exports in 2008/9 stem from a temporary shock, or did it herald a permanently lower level of trade?  The answer has important implications for the UK’s growth prospects.  If it was a permanent hit, then the UK’s weak export growth after the crisis is more explicable, but external growth sources have become less fruitful. We find that advanced economies as a whole exhibited a high degree of bouncebackability, since exports recovered to levels consistent with the pre-crisis relationship between output and exports.  But this masks considerable variability at the country level, with UK exports in particular recovering by less than expected.

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