Shock Transmission and Welfare Effects in Global Production Networks

Most firms engaged in international trade are part of a production network, being a seller and buyer of several products at the same time. These linkages between firms within and across borders expose firms to uncertainty, both directly via their immediate customers and suppliers, and indirectly via their customers' and suppliers' networks of business partners. Importantly, such networks imply heterogeneous responses of firms to upstream or downstream disruptions that depend on the exact structure of their individual value chains. In this project, we empirically study the role of international production networks for the propagation of shocks and the implications for firm behaviour and welfare.In a first part of this research agenda, we will focus on how a firm's reaction to an aggregate shock depends on its international network structure. Using confidential Swiss customs data, proprietary firm data, and a reduced-form event study approach, we will examine the impact of a sudden appreciation of the Swiss Franc in January 2015 on how firms adjusted their export prices (pass-through), quantities, and the average quality of goods exported. The exposure, the extent and the margin of response of any given Swiss exporting firm depends on specific features of its production network, that is, on the share of imported intermediate inputs and on the currency of invoicing of these imports and of their exports. Accordingly, we will study (1) the implications of heterogeneity due to this direct exposure and the interaction between invoicing and a firm's import/export structure. In addition, we measure indirect exposure to the exchange rate shock by means of international and domestic input-output tables to analyse (2) whether indirect exposure to the shock via production networks was quantitatively important.In a second part of the research agenda, we will focus on the propagation of local shocks through the production network. To do so, we rely on a difference-in-differences design where we exploit the staggered introduction of lockdowns during the COVID-19 pandemic over time and space, starting January 2020 in China and followed by lockdowns in Italy and then in northern European countries. These lockdowns led to disruptions of supply chains from the perspective of Swiss firms in the period before Switzerland implemented a partial lockdown itself. Using the same database as above, we study (1) how Swiss companies adjusted their trade flows with existing buyers and suppliers, (2) to what extent they substituted from business partners with local disruptions toward those that were unaffected, and (3) how firm performance was impacted given the modified production network.The results we expect from this research are highly relevant for the literature on supply networks in international macroeconomics. We will also tie together this literature on production networks with the recent literature that highlights the important role of currency choice. It will furthermore deepen our understanding of the effects of the pandemic in a globalised world. In the process, we will also construct a database on transaction-level trade flows that includes firm characteristics and firm balance sheets. We will make all codes and documentation freely available to other researchers who will benefit from reduced start-up costs.