The Value of Value Chains

Usually, the action at the American Economics Association’s annual meeting revolves around weighty pronouncements by prominent economists. What I found striking about this year’s meeting, which was held in New Orleans the first weekend in January, was the considerable attention devoted to value chains. These sessions didn’t attract the huge crowds of the ballroom speeches about inflation and innovation, but they did offer some interesting insights.

One important development is the use of data about individual firms to understand how value chains actually work. Some of the most useful data comes from tax records, which may provide a detailed picture of business-to-business relationships. One such study, presented by Felix Tintelnot of the University of Chicago, uses Belgian tax and customs filings to show that imports account for a far greater share of domestic consumption than the government estimates. A study presented by Yuhei Miyauchi of Boston University, using tax data from Chile, shows how COVID-19 quickly disrupted relationships among domestic firms, forcing value chains to be forged anew. A paper offered by Nitya Pandalai-Nayar of the University of Texas, based on firm-level data, reports that 44% of U.S. factories export, more than twice the rate estimated from government surveys. One consistent finding: traditional trade statistics don’t offer an accurate picture of how value chains work.

Other presentations discussed such matters as firms’ responses to input shortages, ports’ responses to shipping delays, the use of inventories to manage supply-chain risk, and the role of interest rates as a driving force behind globalization. The common thread is that time-worn two-country, two-commodity models of international trade have given way to the understanding that trade is undertaken by firms engaged in complex relationships, not by countries exchanging cloth for wine.

Tags: economics, value chains