The Chains That Bind: Global Value Chain Integration and Currency Conflict Global value chains are continuously changing the international trading landscape, currently accounting for over 60% of global trade, which significantly affects domestic political outcomes. My book project focuses on monetary outcomes and asks: how do global value chains influence currency politics? I argue that global value chain integration shifts the traditional exchange rate preferences of exporting firms away from a desire for a competitive, undervalued exchange rate. As firms increasingly rely on the cross-border exchange of intermediate inputs, they will tend to prefer exchange rate stability over competitiveness, thus alleviating currency conflict. Currency undervaluation is a costly venture by policymakers. Global value chain integration decreases the benefit of an undervalued currency beyond its cost, thus binding policymakers from manipulating their exchange rates for competitive gain.
This study uses a county-level difference-in-difference framework to estimate the share of re-enrollment into the Conservation Reserve Program (CRP) in response to local ethanol production capacity after the Renewable Fuels Standard (RFS). Relatively more land remained in CRP in ethanol-intensive areas after the RFS. This seemingly counter-intuitive result can be explained by post-RFS changes to the CRP that favored ethanol-intensive areas. Both CRP design changes and production trends correlated with ethanol plant location pose challenges for empirical strategies that use ethanol plant location to study production or land use decisions. Changes to CRP policies can play an important role in participation and land use decisions.
The End of the Secret Tariff? Global Supply Chains as a Golden Straitjacket on Currency Manipulation
How do global supply chain linkages affect the exchange rate preferences of firms? Are these linkages empirically important determinants of exchange rate valuations within countries? To address these questions, I model the exchange rate preferences of exporting firms as a function of (i) their reliance on global supply chains and (ii) the distributional effects of exchange rate movements. I demonstrate that global supply chain linkages, in particular the share of foreign inputs in total exports, weaken the traditional preferences among exporting firms for an undervalued exchange rate. Supply chain integration decreases the benefit of maintaining an undervalued currency beyond its cost, thus constraining governments from manipulating their currencies for competitive gain. Utilizing time-series cross-sectional data covering 62 advanced and emerging market economies over the period 1995-2014, I find strong evidence that supply chain linkages bind governments from engaging in competitive exchange rate policies, pushing undervalued currencies towards their equilibrium levels. This effect tends to strengthen as countries move up the supply chain, specializing in more complex manufactured goods. I further show that regional trade agreements (RTAs) are a critical determinant of supply chain expansion, increasing supply chain linkages by over 60 percent. Together, these results suggest that inclusive measures that bind economies together via supply chain linkages, in particular, RTAs, may act as a golden straitjacket on currency manipulation, thus ending the so-called "secret tariff" of an undervalued exchange rate.
How durable is the European Union? Scholars have long feared that regional economic specialization, fostered by freer trade, would make the EU vulnerable to economic shocks. The most acute concerns surround the adoption of the common currency. The Euro is feared to raise the risk of asymmetric shocks, rendering the EU less of an "optimum currency area." The Great Recession of 2008-09 presents the perfect context to assess these predictions. We systematically test them using a novel dataset that covers all of the EU’s subnational regions and major sectors of the economy. We find that the EU’s most specialized regions actually fared better during the crisis. Specialized regions fared worse only within states outside the Eurozone. The heightened vulnerability of non-Eurozone states cannot be attributed to any failure of monetary, fiscal, or social policy on their part. Rather, our results suggest the common currency may have helped Eurozone members share risk. Despite growing political tensions within and among member states, our results bode well for the resiliency of the European Union.
Predicting Revealed Trade Preferences: A Factor Content Approach.
The field of international political economy has relied upon the Heckscher-Ohlin model of factor endowments to predict individual trade-policy preferences for several decades. However, prior work in the field of economics has shown that a country’s factor endowment only correctly predicts the direction of trade 50% of the time. In this paper I include a critical assumption from the Heckscher-Ohlin model in my empirical strategy, which provides a better fit to the data than all prior studies on individual trade preferences. Instead of assuming that the abundant factor in an economy is used intensively in the production of export goods, I include the factor intensity and the direction of trade for each individual’s industry of employment. I show that this factor content of trade approach better fits the data than a simple factor endowment approach. Moreover, although low-skilled labor exhibits consistent anti-trade preferences, the individual preferences of high-skilled labor depends largely upon the factor intensity of the individual’s industry of employment.
Trade liberalization, scholars have long recognized, improves the general welfare of an economy by increasing consumption opportunities due to increased competition. In the long term, however, as firms become more productive and squeeze smaller firms out of the marketplace, trade liberalization may actually have anti-competitive effects. This paper tests predictions on the behavior of aggregate prices, markups and productivity in response to trade liberalization derived from the Melitz and Ottaviano (2008) model of international trade with heterogeneous firms. Following an approach by Chen, Imbs and Scott (2009), the model’s equilibrium conditions for the short- and long-run distribution of the aggregate variables are amended to yield regression equations that identify the effects of tariffs and trade openness on domestic competition in the marketplace. Further to this, model predictions on the effects of third-country openness to trade are tested and information on industry market structure is used to separately test the model’s short- and long run predictions. Our framework is estimated on a dataset covering nine manufacturing industries at the two-digit level in the NAFTA member countries Canada, Mexico and the USA from 1994 to 2006. Consistent with the theoretical predictions, we find that in the short–term there are competitive effects of trade openness on prices, markups, and productivity, whereas in the long–term some of these effects are reversed. Third-country effects, however, run contrary to theoretical predictions and direct tests of short- and long-run industry reactions remain inconclusive.
Central Banks in Chains? Global Value Chain Integration and Monetary Policy Outcomes (work in progress - conditionally accepted for special issue of Economics & Politics, "Firms, States, and Global Production")
Global value chain (GVC) integration over the previous three decades has upended IPE theories of exchange rate politics (e.g., Frieden 2014) given the empirical disconnect between exchange rates and trade (e.g., Ollivaud, Rusticelli, and Schwellnus 2015; Ruta, Ahmed, and Appendino 2015; Cheng, Hong, Seneviratne, and van Elkan 2016). In a recent paper, I argue that the traditional exchange rate preferences of globally-integrated firms (and countries when aggregated) adjust conditional on their GVC reliance. Indeed, in export-dependent countries where we would expect to find depreciated/undervalued exchange rates, my analysis shows that, conditional on their integration in GVCs, there is actually an appreciation/revaluation of their currencies towards the exchange rate’s equilibrium level. In this current paper, I propose to establish the transmission mechanism for this currency revaluation by analyzing the central bank minutes and policy discussions available for 13 economies (Australia, Brazil, Chile, Colombia, Iceland, Japan, Korea, Mexico, Philippines, Sweden, Thailand, Turkey, and the United Kingdom) and the United States, for which minutes are available but not the policy discussions. These quarterly/monthly publications offer the first glimpse of how monetary policy is affected by GVCs across a sample of advanced and develop- ing economies, including two so-called currency manipulators, Japan and Korea. I am utilizing content/textual analysis to study the published minutes of 14 economies from 2010-2018, scouring over 1,000 documents. This paper seeks to understand how GVCs affect monetary policy at the national level. Its contributions include a theoretical reconsideration of exchange rate preferences conditional on GVCs and an empirical test of this conditional preference theory utilizing a unique data on central bank minutes and policy discussions.