Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable.
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# Global Supply Chains: The Looming Great Reallocation

Authors:   
Discussant: None  
Video: https://www.youtube.com/watch?v=SL3ZezYfknQ&t=20s


## Talk (00:00:20 – 00:28:49)

[00:00:20] I'm going to introduce our speakers and today  we'll be talking about global uh Supply chains this session will essentially provide a deep  dive into the topic and uh we all know this topic has been top of mind for quite a few years  now um with notable changes in in US trade policy  
[00:00:39] uh starting in early 2018 and then significant  disruptions during the covid pandemic U many have argued that we are witnessing a retreat from  globalization and as a consequence we should think very hard and try to understand what  is happening to trade flows what's happening  
[00:00:56] to financial flows how are us importers and  exporters and those globally as well adjusting to the new reality and importantly and taking a  step back How do trade and finance come together to determine in the new Geographic footprint of  global trade and global economic activity so to  
[00:01:14] help us think through these issues let me turn  it over to uh the paper presenter we are excited to have Laura Alfaro Warren Albert professor of  business administration at the Harvard Business School present two of her research projects  uh titled Global Supply chains the great the  
[00:01:31] looming great reallocation and Bank financing  of Global Supply chains Laura the floor is yours thanks to the organizers uh for bringing me to a  place with a beautiful sun when I left Boston it  
[00:02:06] was miserable it was raining and so it's always  appreciated to come to a little bit closer to the toopics so I'm going to present um as Celia  said two papers one it was a paper that we were  
[00:02:22] commissioned for the Jackson Hall conference and  in fact I do um thank the organizers uh because they suggested the paper some of you may have  seen it apologies I don't have new jokes uh I'm going to recycle old jokes because I do know  the president of the Costa Rican Central Bank  
[00:02:40] here is here and that does put a lot of pressure  and then uh this is co-author work with DAV in chore and I'm also going to present a new work uh  that we're building on that previous presentation that is with uh Camelia Marisa and Andrea that is  trying to understand how these patterns came to be  
[00:03:00] and so I usually pres start this presentation by  mentioning that all of my colors and myself were children of globalization we were born in one  country we came to the US and so we were part of this optimism uh of the 9s and 2000s me  being probably the oldest of the group where  
[00:03:20] we saw the changes associated with reductions of  tariffs policy barriers and technological change that allow one firm to go to another country hire  labor a source inputs and sell to another one in  
[00:03:36] the case of Costa Rica Intel is the example of of  this process and the supply chains um Revolution and the seek for efficiency and profit was about  also bringing growth and development uh to many countries and as I said Costa Rica did with  this some of these changes my author is also  
[00:03:57] from Singapore so again in many ways we're part of  this optimism F fast forward to now and then we're in this world where there are these concerns of  natural disasters the rethinking about the costs  
[00:04:12] of globalization in particular Supply chains there  is this concern that they're actually um exposing firms and countries to disruption risk what is  interesting is that this is also on the back of a backlash mostly developed countries against  globalization this is work that I have been doing  
[00:04:32] with Dave and Maggie where we have been conducting  representative samples survey in the US since 218 and we have documented not only on average people  are now against trade but also there's a trend to  
[00:04:48] go that has been increasing but perhaps for  us what is a little bit more disheartening is that even when we mention the benefits of trade or  we mention the cost of the tariffs we still find people are willing to impose tariffs and in part  because they cannot disassociate trade with trade  
[00:05:08] with China and loss of jobs and I do mention  that this is mostly in developed countries it has also been documented in Europe and in others  but in developing countries even though there's a trend on average there's still support from glob  globalization so we see this backlash and in this  
[00:05:27] backlash we have seen rich countries Rost tariffs  and this new view that perhaps trading with friends will reduce the risks so in this paper  what we did in the paper with day what we did is we decided to take a broad view we went back to  the '90s if you're old as old as me the '90s is  
[00:05:45] not that long ago if you're like my students is  decades ago although I keep telling them we have better music um maybe only Taylor Swift will  survive this era but that is fine and so we go back and we look at Partners products modes a  value change position and then we zoom in the  
[00:06:06] last 5 years six years and look for four hints of  reshoring near Shoring and we Advan two big points the first one is and again this is also being  said by other Economist like PA anas and Penny  
[00:06:22] Goldberg and Richard Balwin we are not seeing  the globalization yet and I do stress the yet but we're not seeing it even in the US the last  five years six years have been years of growth in trade and one does need to be careful and again  many authors have said that not to extrapolate  
[00:06:42] the growth rates that we observed in the90s  and the growth rates we observe now as we're de globalizing of course after the 80s and 90s  we were going to see very high growth rates the growth rates when you go from zero to one to two  are very different from the growth rates from 100  
[00:06:59] 101 and 102 a barriers significant barriers fell  and so we saw those high growth rates we won't see them now the other thing to be careful is that  um China reached levels of trade to GDP that one  
[00:07:17] could argue were excessively high for a country  that size and perhaps they were not even optimal and so China has also tried to rebalance their  growth after the global financial crisis trying to H do more local consumption more investment  and thus their trade to GDP has gone down but  
[00:07:36] again one may argue that it could be optimal  but a lot of the changes are actually driven by China rich countries have actually maintained  or increase their trade levels uh to GDP so we're not seeing the globalization but we are seeing  what we call the great reallocation of global  
[00:07:52] value chains and so we're seeing from the point of  view of the US less trade with China as a market share it used to be close to 22% Imports it went  down to 16 in 2022 it is now close 213 and who has  
[00:08:10] taken that market share it has been friends like  Vietnam it has been friends that are close by like Mexico so so we look at these effects and what  is interesting is that these effects happen very quickly there there is an little appreciation  of how quickly this reallocation has change  
[00:08:29] has taken place it we usually tend to think that  there are fixed costs these relations take time to find and thus they tend to uh stay for a while and  there was a very quick switch and so in this new paper we're trying to understand how this happened  and we explored the role of banks in allowing that  
[00:08:49] very quick reallocation to happen but then we  also raised two points of caution the first is this will be costly as tariffs were costly and  there is enough evidence to show that the tariffs were paid by us consumers the consumers are also  probably going to pay the real location so going  
[00:09:09] to Vietnam and going to China away from China  going to Vietnam and Mexico is has higher unit costs and also it may likely not reduce the  total dependence from a firm that is owned by China and again the government is not trying to  eliminate all trade with China it's impossible  
[00:09:29] China is very big it's supposed to be just uh  from strategic products but still it is likely that this uh won't happen and so as I said in the  paper we start going back and and we look at a the  
[00:09:47] period in the 90s and there's a little bit of  um level problem here my water keeps dropping so hopefully this won't be a disaster so but the  9s already saw this big change where the US switch  
[00:10:04] from high income Partners to lower income Partners  so this is the time where the us change from Japan to China and from Canada to Mexico and this is  the gray line to the dash line and so we see this change what is also interesting about the us and  we tend to talk a lot about global value chains  
[00:10:25] they are actually more Regional than Global so  in this period even though there were substantial shocks the US has maintained relatively constant  market shares with Europe close to 20% and yes I'm including the UK there sorry UK um Asia is close  to uh 40 NAFTA directly or they can do it through  
[00:10:48] FDI this was the way that Japan dealt and Japanese  companies dealt with a lot of protectionism but also higher costs in Japan so all the stories we  hear now about a country that has better cars that they help with the environment and there's also  security concerns with semiconductors and some  
[00:11:07] other things where part of the 70s 80s 90s and  what did Japan do Japan started to open plants in the US so in fact if you look at the direct  involvement of a Japanese own firm via Imports  
[00:11:22] or FDI the share of Japan is actually higher than  China and that is the blue line and that is also true for other rich countries so again we like  to stress the role of FDI because it has always been a way in which countries deal with barriers  but also increasing um costs in their own country  
[00:11:43] and I'll I'll come back to this point china will  try to do this it's unlikely that they're going to be able to do it in the US but will try  to engage also in FDI to go around barriers the other thing we do is we summarize US exports  and imports through a measure that was developed  
[00:12:01] by m author DAV that is called the upstreamness of  exports Imports trade so a product product is very Downstream if it's very close to the final product  so think textiles think toys those directly go to  
[00:12:17] the final product a product is very Upstream if  it has to go certain stages before it reaches the final consumer think semiconductors think  chemicals think oil so you can see from the figure that on average US exports have always  been higher Upstream than the Imports what is  
[00:12:36] also interesting is that even though orts were  relatively Downstream around the 2010 there was a big dive and they became even more Downstream  this is associated with the US Energy dependence so it's not only that the US a Shale and oil  the was production Boom the US has become more  
[00:12:56] energy efficient and so this has meant that the US  turned from a net export importer of energy to a net exporter and that means that the Imports are  now more Downstream and I we also like to stress  
[00:13:11] this because countries are trying to deal with  climate change a lot of the energy for climate change as of right now is very nontradable and  so this probably will look like de globalization because countries are not going out to buy oil  but it's not really Global the globalization the  
[00:13:30] way we think about it it's just the outcome of a  as of right now a lot of these energies are very nontradable and and so we also like to stress  that the fight of climate may look like the globalization but it's not really what we have in  mind as the globalization so then we zoom in to  
[00:13:47] the last five years and as I said this is a period  where the US a real ER Imports grew by 6.7 in fact if you go to 2023 they grew in real terms by 10%  this is a time also where imports from China grew  
[00:14:04] up to 2022 2023 they went down because there's a  price effect but overall the US has been out there trading however what is clear is this reallocation  and so you see the loss of market share by China close to 5 percentage points and if China and Asia  loses Asia wins Vietnam has won what we call High  
[00:14:27] income Asia has won that is Korea Singapore Taiwan  what is Middle income Asia has won that is India Thailand and Malaysia who else has won mafta in  fact that managed to reverse some of the losses of Canada and Mexico has also increased at that time  last year we stressed a lot the role of Mexico  
[00:14:50] because Mexico already had a very high and deep  integration with the US and there's gaining more it turns out that right now the biggest market  share win if you at 2023 has been Mexico and China has lost eight percentage points which is close  to onethird of the share uh with the US we also  
[00:15:09] plot the four if you want buckets of products or  sectors that have dominated um policy debates that is Auto auto parts semiconductors and electronics  and if you do a little bit of iBall econometrics  
[00:15:25] you can see some of the changes semiconductors  is evident you do see China losing market share you see high income Asia winning market share but  you see it also in electronics you see it in cars especially with Mexico and other parts also with  Vietnam and so in the paper we do a little bit  
[00:15:43] of econometrics um which I know probably doesn't  fit well with this glorious location in Florida but it's nice to do a little bit of a econometrics  every morning um before you go and enjoy the sun and the and the waves and the reason why we like  to stress this econometrics is that what we do is  
[00:16:04] let me find a four digigit product that you used  to be traded in China can I find it in Vietnam can I find it in Mexico can I find it in high income  Asia middle income Asia or Europe it turns out  
[00:16:20] these countries pretty much span the changes in  the US market share so it's not mechanical that this has to add to one but you see that the rest  of the world is not significant this pretty much account for the a lot of the chain Ireland and  Switzerland a lot of it was was also related with  
[00:16:39] covid but the other thing that we do is plot and  I don't know if you can see a Vietnam and Mexico and here what I want to stress you know there is  this movement to try to get kids out of Tik Tok if you want kids to get out of Tik Tok give them  trade data give them trade data at four digits  
[00:16:58] give them trade data at six digits you're going  to see you go into the rabbit hole and you start looking 85 what is 85 is the electronics and  this is transport and this is metals they may even pick up a periodic table to find out why  there's so many metals being traded and what are  
[00:17:16] the Ceramics and what are the glass but what  I want you to see and you will see also that you will go into the rabbit hole of trade data is  Mexico has a lot of four digits it is very dense I have always known the relation Mexico us was  important quantitatively I was not aware how  
[00:17:37] deep it was us every four digit product is there  it's not the same as Vietnam and in fact that's why we had to do four digits because if we went  six I would find them in Mexico I wouldn't find them in Vietnam so it is a very deep relation in  products it was a very deep relation in quantities  
[00:17:55] and it is increasing and so again we go into the  rabbit hole of the for digits and we tried to get a sense of what was going on so Vietnam is very  Downstream it is textiles it is wood plastic wood  
[00:18:14] H floor coverings everything that you go into a  house and you think it's wood is not it's plastic and it comes from Vietnam so already a lot of  that was coming but Vietnam is going a little bit Upstream a Electronics microphones but it is still  very labor intensive Mexico on the other hand is  
[00:18:32] everything it is everything you can think of it's  there from Electronics to cars to everything it does seem to suggest that more than labor share  is associated with the fact that they're close and they already have very deep a supply networks  and so a there's it's the movement to Mexico what  
[00:18:52] is clear from all of the regressions is that  tariffs played a role some firms were moving but tariffs made firms move faster and so that  is caution number one ER this is likely to have  
[00:19:09] costs so we look at unit costs unit cost is proxy  of the value it could be a proxy of quality but in this case we argue it's more a proxy of cost and  products that used to be in China that are now being brought from Vietnam are close to 10% more  expensive products that used to be in China are  
[00:19:28] now being brought from Mexico are close to 34%  more expensive with this data I cannot tell you if it's Supply or demand because as I told you  all the Trump tariffs were passed to the consumers so if I'm a firm now doing in Vietnam I have that  that I can pass to Consumers but from Talking the  
[00:19:48] speed this has happened does seem to be associated  with increasing cost of production and so it is likely to be a mix of supply and demand and so  this that I just told you it's all at the trade level uh so we try to find an aggregated at the  firm level to find intent and so we use data from  
[00:20:11] tare Hassan from earning calls and we go and look  I was in China am I trying to open in Vietnam am I trying to open in Mexico and you do see a spike in  the data oops you do see a spike in the data where  
[00:20:28] it is a strategy to conduct business and you do  see that in the data but as I mentioned most of the analysis so far has been at the trade level  but not at the firm level and so it we want to explore a little bit more these changes at the  firm level and as I said it is unappreciated  
[00:20:52] this amount of fixed costs that exist to be  able to do trade abroad to the point that the average firm or the median firm actually only  has one supplier in another country so so it is a specifications of the product you you have it  also Al takes time you need to go in a boat find  
[00:21:10] the product again there is a fixed cost and the  typical is you only do one and this change was extremely fast so in the paper H with Camelia and  other co-authors we're trying to understand what enable this extremely fast transformation of the  US Supply H change abroad and what we do is we get  
[00:21:33] this data set that is from panba that allows  us to m firms to suppliers and products it is shipping so we are limited to things that happen  in Asia relative to Mexico a lot of the trade with Mexico happens with trucks so we focus on Asia  and we first document at the firm level because  
[00:21:53] these data is at the firm level that indeed  these patterns that we saw in the trade data at at the firm level it is associated with firms  changing their supplier relations they're doing less from China and more from Asia but we wanted  to understand a little bit more what enabled this  
[00:22:12] uh and so again this is just trying to do that  same regression that we did at the trade level at the firm level and we do find that there  are now doing less suppliers in China they're entering Less in China they're entering more in  Asia and the net is now higher in Asia but as  
[00:22:30] I said we want to find out why this was able to  happen so so fast if the literature tells us and what has been documented to date is that these  relations tend to be very sticky and of course we look into the role of banks why do we look at  the role of banks because Banks specializ Banks  
[00:22:51] that is what they do they're supposed to provide  information to clients if you're a specialized Bank you have better knowledge you can help your  firms do that but also relationship banking is about understanding your customer better it's  about understanding The Firm that you lend to  
[00:23:07] better and so this was a moment that we argue this  relationship banking should be able to allow the firms to exploit the knowledge and the relation to  try to enter into um Asia and some other countries  
[00:23:22] and so that is the pothesis that we test Banks  enable firms to do this reallocation very quickly and indeed looking in general we do find that  there was increase in the use of credit lines there was increase in the use of credit there  was also a lower cost lower an increase in the  
[00:23:43] cost and in the long amounts so there was clearly  an increas in demand firms wanted to borrow to be able to cover these fixed costs trying to find a  new firm in another country set up the shop so on and so forth increas in demand but then we tried  to find out if the banks that had better knowledge  
[00:24:03] help their clients and we do find evidence of that  it turns out that if you were in a special banking relationship you were charg a lower interest  rates so there was an advantage to this process that we're trying to understand what has enable  uh this change and indeed Banks were doing uh  
[00:24:20] the job at the right time to the right firms and  so then we go and also present caution number two as I said the way Japan dealt with a lot of  trade costs a internal Japan was developing Ving  
[00:24:37] is paying higher wages it was Japan open shops  somewhere else this is also what China is doing so it has always been an explicit policy of China not  to set FDI in Mexico and in fact when you go and look at the FDI data in Mexico it's overwhelming  us China always consider Mexico as a competitor  
[00:24:59] that is changing so Mexico has very good data so  you can find at four digigit six digit of trade ownership of the foreign firm and location and if  you look at the aggregate it is still us if you look at two sectors Auto and Auto Parts 75% of all  new FDI is China and again it is going into some  
[00:25:21] other sectors so it used to be a competitor now  they're using Mexico as a potential way to deal with all these tariffs China has always been in  Vietnam Vietnam doesn't have the great data that Mexico has but Nina pnik from darmouth has study  the case of Vietnam and indeed there is different  
[00:25:40] sources from us other Asian countries but China  has always had a presence in Vietnam and it's also increasing and it's interesting that it's  increasing during covid so one way they're going to get around is FDI and the other is when we look  at the US main trade Partners in every single one  
[00:25:58] of them China's increasing market share except  Japan if you look at G20 countries in every single one of G20 countries China number one or number  two I was in Brazil last week electric cars guess where they're coming from uh and every other Uber  had an electric car so penetration so again the  
[00:26:20] policy is not to eliminate dependence of China it  cannot be done but it is likely that it will be very difficult to end dependence from a firm that  is own by uh China because of the different modes of Entry this is just again to score Mexico has  become the main trade partner and the main changes  
[00:26:41] but it was always there but what is interesting  is Mexico has never seen the level of imports of capital goods and the share of investment in  20 years and and I mentioned this because it's very hard to see FDI data at the macro level in  Mexico and growth and productivity but when you  
[00:26:59] go to the Micro Data you see it there there is a  transformation in Mexico again even with the Deep integration they already had with the US is the US  near Shoring so remember the upstreamness measure  
[00:27:14] when you go at the end of the period you do see  a little bit of an increase in US Imports and so one could argue that those things that were very  Downstream that used to be imported now they're producing the us but again it's very hard to tell  a lot of these changes are happening a lot of the  
[00:27:32] investment announcements as of right now you do  see an increase in semiconductors so so it is possible that a lot of the change will happen  in semiconductors so to conclude we are seeing the great reallocation of global value change from  the point of view of the US FRS are gaining market  
[00:27:52] share countries that are close by are earning  market share and perhaps some evidence of restoring but again it's very early to talk  about that but caution this will be costly this reallocation is happening faster that  probably firms would have done it and it will  
[00:28:09] have implications in terms of uni cost and also  if China is also reallocating so it yet to be seen what would be the final effects having said  that we do find that Banks played a big role in allowing this relocation and for that sound  Banks were helpful in allowing the firms and  
[00:28:29] relationship banking to undertake a lot of these  changes having said that we do conclude the paper by saying that a lot of this policy it would  be nice if there's some cost evaluation social evaluation of what is the impact and what are the  benefits again once the data is available thanks  

## Discussion (00:28:49 – 00:47:03)

[00:28:49] thank you Laura our discussion for the paper is  Julian dejani um his department head of climate risk studies in the research and statistics group  at the New York fed um thanks for being willing to discuss these papers the floor is yours thank you  very much Camilia thank you to invite for inviting  
[00:29:08] me and to the organizers as well for setting up a  great conference so far okay so I got to discuss two papers which is very nice so it's going to  be a bit of a you know a broad discussion but to help fix ideas first what is a global supply chain  I thought it'd be useful to um put up the global  
[00:29:26] supply chain of our favorite mobile device the  Apple iPhone just to give an idea you know what's going on around the world ideas come from Silicon  Valley but then Apple sources you know different parts of the iPhone from all over the world before  final assembly and production takes place in China  
[00:29:43] and the good is shipped um to to to customers  all over the place recently I don't know y um you might have seen in the news that foxcon the main  major assembler of the iPhone in in China indeed Apple still very seems to be very entrenched in  China but it does give you an idea that not just  
[00:30:00] looking at specifically us Imports as um as laara  and her co-authors do but just thinking about the whole supply chain of a a large US firm right  ships are happening and what this might mean for the future is definitely an interesting question  to think about and something that Lara's papers  
[00:30:17] um have really you know made me think about over  the last couple of weeks quite a bit okay so what are we doing here two papers that use a lot of  data at different levels of granularity so just to give a brief summary paper one with um D chore  um thinks focus on us firms changing sources of  
[00:30:35] intermediate input over 5year period including Co  I should um you know we should take into account they explore sector level measures supply chain  positions as well as earnings calls FDI data so there's a lot going on here but the three I would  say punch lines that Lara elucidated already is  
[00:30:53] the notion that us are shifting away at least at  the product level from Chinese suppliers to France Mexico Vietnam Etc but there might be a potential  cost for this um namely increase in unit value of products and in truth might not be Diversified  so much when you start looking at FDI data and  
[00:31:10] seeing that maybe some of these Mexican firms  are all of a sudden being bought up by Chinese firms or represent Chinese Affiliates so paper two  goes into even more granular data and they take this Pangia supplier you know you know kind of  basically what US firm they from panjiva sources  
[00:31:30] from us um Customs where every firm in the US  economy sources their their um their their goods from okay at least for the first stage and think  about this and merge it with credit registry data for the US so it's a huge data set provides a lot  of granular information and then they can start  
[00:31:46] thinking about you know more facts on supplier  chain linkages as well as how these changes are financed okay so what do they find well first  like paper one they find that the Tariff hit um the tariffs tended for some substitution away from  Chinese direct suppliers um towards other friendly  
[00:32:03] countries and along the way us firms us import  specifically demanded more credit for these for these changes okay now there's a little there's  a discussion that this might be also indicated of some type of financial constraints and the authors  note for example that depending on the banking  
[00:32:19] relationship a given um importer us importer has  might lead to easier access to credit or you know or larger import share which they kind of take as  easier access to credit or lower credit um Credit Credit um costs okay all right so my discussion  there's a lot of facts here so I'm going to zoom  
[00:32:41] out I'm an international macroeconomist although  I work with micro dat as well but I thought it'd be nice to First think about what globalization  has looked like in a few figures um to date over the last 200 years then think about a bit more  about these micro facts what they might mean um for macro risk um and in particular what I would  think about as supply chain resilience and I'll  
[00:33:02] leverage some work I've done on this and finally  I'm going to hopefully get some specific comments that are useful on the two papers um along the way  okay so first let's look at how World Trade has evolved over time so we always we can think about  as really two waves of globalization over the  
[00:33:18] last 200 years so kind of the pre um preor War II  where we're plotting World Trade over total world GDP a growth in trade well the world World War  I and World War II I should say kind of stopped that quite a while it was the same same a similar  picture in fact for Capital flows and then since  
[00:33:35] particularly since the 1980 s trade has boomed  around the world okay so there an exponential growth until the global financial crisis where  it has slowed down and as Laura mentioned in her discussion this is actually to be expected on some  level given the high growth rates we they saw in  
[00:33:50] the previous couple of decades so what might have  you know been driving such changes well first both shipping and communication costs have um Fallen  quite a lot over time and indeed there's there's a beautiful paper by K mui he wrote actually when  he was at the New York fed um which show that even  
[00:34:07] small small changes in trade costs can have huge  changes on trade flows around the world once you start actually factoring in these these Supply  chains because it's just going to you know kind of the as the chain gets longer and longer and  more trade kind of flows through it since it's  
[00:34:22] in Gross terms it's just going to get larger in  actual numbers okay two obviously China not just China but I I would say the World Trade regime  you know Liber started to liberalize a lot more but you do have what I call the China shock um  when they entered the WTO especially in the 2000s  
[00:34:40] that really expanded you know the availability of  cheap labor for firms to try to Outsource produce new Goods okay so all this arguably has also led  to kind of very complex Global production networks to develop and here I'm giving a couple of pretty  complex looking pictures um but kind of what em we  
[00:35:01] can embed in our macro models to think about how  shocks might spell over across countries as well as across Industries so um on the blue the blue  ones and this is from the paper from co-authors capture just nodes that are linking countries with  their two larger largest tradeing Partners okay  
[00:35:18] so in fact the kind at the country level the the  network is actually even more complex than what this looks like okay and then we scale it it's  scaled by size of the country by the actual flows so that's a blue and on on the right side on the  red it's across industry so this is using sector  
[00:35:34] level data not firm level data and just is to make  the point you put these two together and you have a very very complex kind of interweaving of of  transactions around the world in in international trade both across manufacturing sectors how  manufacturing sectors spills into Services  
[00:35:51] Etc and all this matters you know when we want to  think about in particular shock propagation what we saw during covid inflation spillovers Etc  okay so going forward you know with all this friend Shoring reshoring Etc you know are is  the world World facing or the US in particular  
[00:36:08] facing fewer or greater risks okay so perhaps the  globalization party as we know it is over you know and you know given covid geopolitics climate  risk there's a lot of reasons to think that yeah the world is definitely going to be changing  but then a question arises you know will FR FR um  
[00:36:25] FR Shoring or reshoring even make the US economy  more resilient at least on the production side and I would say applies to all countries around the  world so a priority at least to my thinking of the problem not so obvious okay why well I just showed  you a production Network that looks pretty complex  
[00:36:45] right and as Lara is explaining for example even  you know Mexican firms might be repr you know held by Chinese companies so that's you know as long  as we have these production networks going the world is in an isolation to give a more specific  example so a little self-advertisement apologies  
[00:37:00] um but some some joint work with J osar oan Alvar  Silva and um ym we we we construct a large model of Global Production linkages to think about kind  of how shocks transmitted um throughout the world  
[00:37:16] during the co year in particular and what such  models show is that there's a slew of of of things we have to think about when thinking about  you know spillovers and the production networks around the world for example both domestic and  Ford aggregate demand shocks will okay impact inflation we kind of understand this from basic  macro models but then you kind of drill down and  
[00:37:35] start realizing well set what's going on the  sector level matters as well right in terms of productivity shocks in terms of factor supplies  right you callose one Factory in China workers can't go to work this is going to spill over  everywhere moreover kind of global imbalances we've all thought about this in terms of capital  flows or you know savings and investment it also  
[00:37:53] matters in terms of demand um and in particular  sectors as well or these kind of bottlenecks can can be created so you know in thinking about  resilience we have to go look Beyond just where firms sourcing and think about you know where  you know kind of the the whole chain the Global  
[00:38:11] Production Network as well as the source and types  of shocks um that might be hitting the economy going forward and and in that lens think about  this in terms of resilience okay so maybe getting into the papers a bit more um so paper number one  okay um think about the microact so you know as  
[00:38:31] I've already mentioned thinking about the global  network is I think Paramount but even in what i' would call a partial equilibrium analysis just  focusing on what's going on in the US specifically you know one question comes out is like how many  vietnams are need to replace one China so I think  
[00:38:46] laa was very you know very upfront about you know  not getting rid of China altogether but you know for me at least calculations given the regression  results turning to the unit kind of the rising unit costs you know the big question was like what  are they capturing you know is a more expensive  
[00:39:02] Factor cost in sourcing countries indeed China  you know the real wages been going up quite quite a lot over time already so we might have already  expected some of this kind of firm searching for cheaper locations okay um larger transport costs  are these setup or switching costs you know are  
[00:39:18] they transitory are they longer run I mean to  think about kind of what might go on with unit cost going forward or inflation in particular  is it a one-time change or is it something kind that we have to worry about reshuffling  going on all the time and of course you know General equilibrium effect of things like tariffs  obviously are going to spill over an impact cost  
[00:39:36] from goods comeing from other countries okay so  paper two which is definitely more of a work in progress so I think the rest of my time I was just  spend on comments here so first it provides some you know super interesting complimentary evidence  on the fren Shore and using these more granular  
[00:39:52] data and you know so I'm in the world of macro  networks i' I've fortunately never had to work with like firm level supplier um data but it's  huge so just everyone should be applauding just for them working on these data took a lot of time  I have no doubt okay and what they find is indeed  
[00:40:10] to you know just like with the product level  they find that us firms increase the number of non-chinese suppliers and decrease their Chinese  ones over the time period that they during the first trade War okay so again I came back to ask  will this you know neily damp the potential risks to production change and overall macro risk so the  answer is it depends um you know key question is  
[00:40:32] how how Diversified are firms and L presented  something about you know the average firm has only one importer um indeed I've worked a lot with  French data not us data but you see the similar patterns across countries um and in particular  firms tend to not diversify very much and even  
[00:40:48] when they do these large kind of conglomerates  even within the product level they tend to be very specialized so it's not obvious that you  know first that firms really want to diversify so much but even when they do they might still skew  like have one super important supplier one super  
[00:41:05] important export market and in that case you know  idiosyncratic shocks whether it be a climate event something going on in the country specifically  might still have a large effect so even firms might look a bit Diversified it's it's not  necessarily the case secondly of course it depends on the ease of Shifting production both you know  within a firm across firms across countries and  
[00:41:25] while it does look like you know it's interesting  the US firms did adapt quite quickly um given kind of the 2017 18 events going forward it still  takes time right we definitely saw during covid of course it was a world shock but firms could  not nimbly jump around so easily and in general  
[00:41:43] kind of what we you know in economics about  elasticities of substitution matter a lot and in generally we think they're quite quite low in  the short run versus being higher in the long run short run think business cycle long run you know  five 10 years out okay so all this is is important  
[00:41:59] to think about taking these results in context  going forward okay so some more specific questions so the paper was very much l mentioned fixed  costs um and thinking about what firms have to overcome to find new um new suppliers they use the  language of the paper very much about search costs  
[00:42:18] okay so it naturally you know kind of led to the  question what are the costs faced by us importers um in getting the new suppliers and they only have  indirect evidence but for sure there's other doing business costs um to find new suppliers that needs  upfront financing so it' be useful to see if also  
[00:42:35] these firms in their sample are you know accessing  Trade Credit um which you know maybe some of this information is excuse me is available at the bank  or the firm levels for example you know looking at accounts receivables Etc a second point which is  and this paper focuses more on exports but it's  
[00:42:53] something that I think is is often overlooked  is that there's a natural Network effect that domestic firms might take advantage when entering  into foreign markets so there's a beautiful very nice paper by thas Shan and the AEO he makes the  point that it's you know the more kind of foreign  
[00:43:10] if you're a us for more us firms that are in  Vietnam the easier it might be for a new US firm to access it to access V and at a lower cost  so I think this is actually something you could probably control for using your data and it would  just be interesting to see if we see such patterns in the data okay my second question really like  what are firm Financial constraints so this is  
[00:43:31] you know all very reduced form and I know it's a  very hard question get it in general okay um so the authors try to control kind of control for it  using what call non-time varying fixed effects Etc or predetermined variables but more generally you  know we could think that as tariffs were be put  
[00:43:49] in place Etc that time you know that firms might  become more risky okay those who are already in China might be viewed as more risky by Banks  Etc so there might be just some inter you know interrelated relationships that they should think  about in the data but more generally you know if  
[00:44:05] firms appear to be getting the necessary credit  for finances so you know so that they can actually create these new um Supply relationships what  are the constraints so I got stuck a bit thinking about or asking myself what is the counterfactual  is that firm should have gotten even more access  
[00:44:21] to more uh more loans so they could develop even  more relationships or is it simply that they're paying a higher cost of credit but to me at least  I do my my my cross is right like higher demand usually kind of increases price so you would think  that perhaps they would be actually getting higher  
[00:44:36] ratees so it wasn't obvious to me that there's  a particularly Financial constraint going on um in in in their analysis and my my final question  was really you know how to interpret the results on the banking relationships which I think stood  in a bit for an easing of financial constraints  
[00:44:53] um you know First Banks specializing in foreign  markets may have followed other domestic firms that are already there right so there's this you  know so these regressions Bank specializations might be picking up this firm Network effect  that I mentioned from the chaet paper okay um and you know to be quite clear I'm not a banking  person um I do work though with a lot of financial  
[00:45:14] people including um Christian blickle um who  has a very nice paper on on Bank specialization and their story in this paper is essentially that  specialized Banks kind of are able to charry pick better firms okay so maybe it's not so surprising  that they're also offering better terms to their  
[00:45:30] loans okay and more generally you know firms that  can borrow from many banks are they better than you know firms that can borrow from single um  sing only from One bank or are they just kind of spreading you know when you're borrowing from  many many banks in general you're just kind of spreading your risk across so again banks are  willing to offer you better terms of your loan  
[00:45:49] okay so I guess in in econometric pance I'm was  worried a bit about selection in your results okay so finally some concluding remarks I mean I  enjoyed reading both papers um gave me a lot of lot to think about you know globalization As We  Know might be over and we're heading to towards  
[00:46:08] a more fragmented trade regime okay so I think  this has implications for both real real economy and of course financial markets what it might  mean for Capital flows but have any time to think about talk about that today there's a ton  of work going on at multilateral institutions thinking about such questions particularly the  IMF and and the you know the research group um  
[00:46:30] are working on thinking about polarization how  this what this might mean overall but that's more in a macro level so I you know documenting  all these micro facts in these two papers super interesting very complimentary you know we have to  you know understand kind of the micro mechanisms to understand how the macro models are working  um which is you know just a conclude important  
[00:46:48] for both researchers like myself as well I guess  I am now the New York fed policy makers as well so thank you very much thank you Julian uh Laura  any comments any responses no first let me let me  

## Q&A (00:47:03 – 01:00:26)

[00:47:03] thank Julian because um one paper is published  and the other one is work in progress and I do appreciate that that does impulse a task and so  all your suggestions all well taken um some of the  
[00:47:18] things you mentioned we have done and and we need  to update the the paper but let me just give some some some Er broad thoughts um what we do think  is very interesting about this episode is that it did happen very quickly and so it is hard to use  existing measures of substitution because they're  
[00:47:39] not going to map well um but it did happen very  quickly and I also think of financial constraints not in general I think Financial constraints  are a te if I can borrow for to buy a house I can self save and after 40 years buy the house  alternative a bank can look at me and say yes she  
[00:48:03] has a stable job she's 10 years she's not gonna  get kicked out um so I can lend her in instead of self- saving but but that's why I do think  Financial constraints have a t is will someone pay give me the money that I need now and I think  that's this case the firms needed to react quickly  
[00:48:24] because there was the tariffs and Banks were able  to see yes at this point I'm going to I know you don't have it you could self save but you need  the money now and that's what happened but but we need to be um clearer on on that it the other  the point on the network is well taken but again  
[00:48:43] I think there is this fact that we tend to forget  is and in part because we're always thinking about Apple but the typical firm has just one supplier  is the folks I found in Mexico when I went there that they are sourcing one thing from Mexico it  is not this complex Apple world and in that world  
[00:49:03] that you only source from one place ER there's not  a lot of externalities in ter of network there are externalities that are more complex that are in  terms of logistics and knowing someone who knows someone who can tell me about that place uh but  but we do need to control about that the other  
[00:49:20] thing is I I agree it's always better to have  a framework it turns out we have the census we do know what span the change in China and that  was the regressions of table one it was those countries those countries accounted for for that  change in China and I can tell you in the last  
[00:49:38] six years the countries that accounted for the  change in China it's a little bit more complex if we want to forecast and and I agree that for  that we do need a model but right now we're trying to be more positive than than normative in the  world of normative there's a lot of work that  
[00:49:55] is coming out on what is the optimal a healthman  from The Economic Department is producing a lot of these great papers and in general there's always  this that diversification is the best strategy much more than near Shoring reshoring is just half  different suppliers but it does have a cost which  
[00:50:13] was the reason why firms didn't do it but the  bigger question of is this building resilience this is the question that we do need a theoretical  and empirical work to try to understand if indeed we're making the more the world more resilient  and I say that because again I am a globalization  
[00:50:31] child um I was born in one country studied another  my husband is for a third and so these changes that all think that the world with less trade is  better make me nervous but also I think we were very quick to judge trade as the reason we had  problems in covid and is actually the opposite  
[00:50:51] trade helped the US in covid there was no world in  the that the us would have consumed the amount of consume if the US had been self-sufficient so so  I think we need to keep in mind that there might be advantages of world trade and the last thing I  want to say is this work that we have done is in  
[00:51:10] Goods there's an obsession about Goods but the US  is a service economy the US actually has a trade surplus in Services Services have continued  to grow the four sectors that I put represent 20% of manufacturing which represents 9% of us  employment and so all of the employment in the US  
[00:51:30] is in services and perhaps we also should think  about them thanks well thank you so much um so let me just say many thanks for all the questions  that are coming here to the iPad and please keep up voting them I am actually going to start with  uh a question that's a little bit more Technical  
[00:51:45] and then go to the big uh policy questions um  just to which might be weird because you may be able to answer it better uh I just want to put  to rest some concerns about data when we work with so much data we want to make sure that it's U  representative of of the activities we're looking at so a question from Ian the US data on imports  from China are 130 billion lower almost 25% than  
[00:52:07] Chinese estimates of their exports to the US this  Gap only opened up with the expansion of tariffs from 20120 might we just be seeing us companies  under recording shipment so there is um I forget the name but if you look at the US trade data  there is um everything else clause and that's the  
[00:52:27] one that has been increasing and many people have  argued that that is some of these things that pay targets are going there um and actually in the  work we did we control a little bit about that but but it is what it is if it's non classif I  forgot the name but it has a name and and that one  
[00:52:44] has increased and it is possible that is is going  there um but but yes if if it's not classified is very hard for us to to fix it but but Point well  taken um the next question is for the both of you um so this is stepping back from this entire body  of work um I have two two questions that speak to  
[00:53:04] the same topic which is the Imp of supply chain  disruptions on inflation so let me quickly run through the questions first one to Laura is the  right interpretation of your research on the great reallocation that it produces relative price  shifts that are not inflationary in the sense  
[00:53:20] that they are onetime shifts in costs our work  is about levels indeed these are reallocation costs they may show up in the data inflation  because they may not necessarily pass in one year if they pass over several years they will  be counted as inflation but but inflation as  
[00:53:36] we all know everywhere and from Latin America is  always about printing um so so we're picking up a relative changes the one thing is that these  tariffs keep coming and there are threats of more tariffs and so it is also possible that  firms may be anticipating and passing before  
[00:53:52] the changes but yes these are relative changes  perfect and just to add on and then also ask Julian for his thoughts what are the implications  of the reallocation in global supply chain for us Consumer Price inflation over what Horizon  should we think about them and you know feel free to draw more broadly on your own research um  in tackling that question so on the relocation I  
[00:54:15] mean again it's I think a said it's not obvious if  these are just onetime costs then it's not going to feed directly into inflation um I mean for in  the short run you can imagine that there will be price hikes so sh up in inflationary but long  run it's it's hard to say I mean and indeed  
[00:54:33] you know at the end of the day I mean these are  Supply shocks so I think more research is coming on this um central banks can you know if it's  relative price changes it's possible that they can fight against it obviously there's trade-offs  to do it okay um let me follow up with another  
[00:54:50] question that kind of ties us back to an earlier  discussion about the very very fast technological Improvement we're seeing Ai and so on do you  feel that there's an interaction between the great reallocation and Technology transformation  uh in particular what do you think is the role of new Technologies in explaining some of the speed  and pattern of the allocation that you see in your  
[00:55:11] work I I don't think the speed that we see is  driven by AI just just because our this starts in 217 and and it might be just too early to  pick up AI um we might see it later the work  
[00:55:30] we're doing also matching the credit registry is  is is before covid so it is not likely to see the effects of AI um but but it is asking a broader  question of what's going to happen as I said the  
[00:55:48] US leads the way in trading Services um and it has  been multinationals that lead the way in trading Services there are also the ones leading the way  in Ai and so it is possible that the effect will be seen more there than than in other parts um and  and that is the question what's going to happen  
[00:56:09] there that concern is being felt by countries  that are on the other side a I was at a panel discussing India and India they worry about that  what is what's it AI going to do to the all the trading Services um I don't think the data has yet  to pick it up um but but it's but it's coming um  
[00:56:31] speaking to uh the second paper you presented on  the role of the banking sector sector and and the resilient banking sector in sort of helping buffer  some of these shocks um does the analysis of banks role suggest anything about how banking structure  relates to lowering the cost of adjustment through  
[00:56:48] through the provision of credit for example  the relative role of large versus small Banks or domestic Banks versus foreign Banks so when  you when you think about specialized Banks is it is it more the domestic ones the ones with global  footprint how should we think about how uh the US  
[00:57:03] banking structure speaks to that real I'm going  to answer this question but you need to check with what I'm saying is correct or not so the  the data set has a thres and so it's relatively larger Banks to begin with so it's not about the  little Brookline Bank in the corner of Brookline  
[00:57:22] um it does speak about banks that have a global  footprint because we do many robustness checks and some are related to banks that do trade  activities and those tend to have a a global footprint the specialized Banks as well is that  they tend to have a lot of their activities in  
[00:57:42] and trading so it does seem to go uh there but  but again my own co-author should check on you you had a question about trade credits we actually  checked and there was no reaction by Chinese firms once you put all the fix effects to try to keep  a US firms with trade credits so it doesn't seem  
[00:58:02] to there doesn't seem to be a lot of action there  but but again it's a relatively recent result and we need to explore more excellent so I'm going  to use the last 40 seconds or so to just ask the mother of all questions what are the policy  implications of the great descriptive evidence you  
[00:58:20] have provided and I'm going to let you put meat  on that question because it's sufficiently broad I don't think the US has done a proper cost  evaluation of any of these policies um as I have said in the past I'm a student of harberger  we do have in the economic profession tools to  
[00:58:37] evaluate cost benefits of policy intervention  it is true that the a lot of the policy is still taking place and true evaluation is exposed  once the policy has been taken out so so it's hard to know as I said we do have evidence  that the consumers paid for all the tariffs  
[00:58:56] which is bizarre if you think about it because  in general is the country with um that is less elastic that is less that that has less  possibility substitute that takes the the the cost of a tariff and it's bizarre that it was the US  one would have thought that it would be China but  
[00:59:15] it was the us so we know that consumers pay for  it and we know that there was a welfare reduction there's a paper by am wayin and Steve breing the  only way I'm going to qualify what I just said is that we Economist do not have good quantitative  models to think about National Security and as I  
[00:59:34] said in the paper I have done with chore and  Maggie Chen there is this big concern in the US that people cannot disentangle jobs from  China and some broader concerns of National Security and I think we economists are very good  at coming up with many things and upsetting other  
[00:59:54] social sciences but we should do some effort to  try to quantify the effects of national security to get a sense if indeed what consumers are  paying more justifies the consumer concerns of National Security well with that I'll  say thank you Laura thank you Julian  
[01:00:10] and we have lunch next and I will  invite you all to join us back at 700 PM for dinner and keynote address  with Professor Ed Glazer thank you  
[01:00:25] m