VOX  CEPR Policy Portal

Low-income countries lack the resources to replicate European-style income support programmes to alleviate the economic impact of COVID-19 lockdowns. In Bangladesh, a key challenge will be to support export-oriented production in the ready-made garment sector, which employs 4 million workers. Whether factories retain or lay off workers in response to government policies – and whether the health crisis escalates into a humanitarian crisis or not – depends crucially on decisions of foreign apparel buyers to honour or drop commitments to previously agreed orders.

With more frequent and severe natural disasters, demand is growing for governments to support affected firms in their recovery. This column investigates the impact of subsidies after the Great East Japan Earthquake. It finds that capital subsidies were effective for the retail sector, but not in the manufacturing or other service sectors. The results suggest that the heterogeneity comes from variations in the degree of private support across sectors rather than variations in supply chain disruption.

Natural disasters can have enormous economic consequences that affect firms both directly and indirectly. Using the example of the Great East Japan Earthquake, this column investigates how the propagation of shocks varies with the characteristics of supply chains. It finds that the indirect effects are far larger than the direct effects. Shocks propagate more widely and are more persistent if supply networks have complex cycles and low input substitutability.

Trade in intermediates (or ‘unbundling of production') and trade in capital have become increasingly important in last 25 years. This column shows that trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. Unbundling of production hurts middle-income countries but helps those with high productivity. Trade in intermediates also increases within-country inequality, and this increase is U-shaped in the aggregate productivity level of the country. 

Natural disasters have enormous economic consequences, with the 2011 Great East Japan Earthquake providing a particularly stark recent example. This column uses supply chain data for more than one million Japanese firms to explore how negative shocks from natural disasters propagate through firm networks. Shocks are found to propagate very quickly, due in large part to certain ‘hub’ firms that have a high number of supply chain partners. Production substitution is the key to slowing the propagation.

Joining international supply chains has helped some developing nations to industrialise while leaving others by the wayside. This column discusses research that extract lessons from four case studies. It suggests the key to success is combining pro-active investment promotion with customised infrastructure improvements and public-private vocational training that allow investors to fit production from a novel site seamlessly into the company’s international supplier network.

The World Trade Organisation is one of the most successful instances of multilateral cooperation post-WWII. Yet WTO negotiators have yet found a way to break the recent deadlock on key elements such as the market access and rule-making dimensions on the agenda since 2001. This column introduces a new CEPR book that suggests the adoption of a ‘supply chain framework’ that could help to mobilise greater support for concluding the Doha Round and provide a basis to use the WTO as a forum for learning from regional initiatives.

Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.

Alejandro Jara talks to Viv Davies about the 2013 WTO Bali ministerial conference and the recent Vox report, ‘Building on Bali’, co-edited with Simon Evenett. Jara presents his views on the post-Bali agenda, mega regional trade agreements and trade protectionism. They also discuss the extent to which the ‘global value chain revolution’ has changed the nature and focus of international trade and trade agreements. Jara concludes by presenting policy recommendations for the way forward. The interview was recorded in January 2014.