Asia Beyond the Global Economic Crisis

Asia Beyond the Global Economic Crisis

The Transmission Mechanism of Financial Shocks

Edited by Satoshi Inomata

The characteristic feature of the recent global economic crisis is the speed and extent of the shock transmission. The development of cross-national production networks in recent years has significantly deepened the economic interdependency between countries, and a shock that occurs in one region can be swiftly and extensively transmitted to the rest of the globe. The sudden contraction of world trade and output was a negative outcome of this intertwined global economic system. Based on the method known as international input–output analyses, this book provides a detailed examination of the mechanics of shock transmission by probing the labyrinth of complex supply networks among nations.

Chapter 3: International Trade and Real Transmission Channels of Financial Shocks in Global Production Networks: An Asian–USA Perspective

Hubert Escaith and Fabien Gonguet

Subjects: asian studies, asian economics, economics and finance, asian economics, international economics


Hubert Escaith and Fabien Gonguet1 1. INTRODUCTION For the past 20 years, globalization has implied not only the expansion of international trade and finance, but also the geographical fragmentation of the production processes within networks of firms associated through contractual arrangements or belonging to multinational enterprises. Nowadays, specific industrial operations, from the conception to the assembly of final products, are no longer undertaken by a single establishment but increasingly outsourced within these global supply chains, leading to what is known as ‘trade in tasks’ (Baldwin, 2006). It is becoming common practice for firms to process unfinished goods through affiliate or non-affiliate firms. Sometimes the goods are manufactured by firms within the domestic economy; sometimes the material is sent abroad. This process is very common among industries such as chemical, electronic and metallic manufacturing. Indeed, most of the enormous growth in trade recorded in the last 20 years consisted in relatively similar goods (manufactures) between relatively similar countries; moreover, this feature is robust to the level of disaggregation: no matter how finely industries are defined, a high proportion of trade takes place within industries rather than between them (Neary, 2009). In 2007, almost half of the world trade in merchandise, excluding oil, was attributed to intermediate goods. This proportion (relative to imported goods) rose to 68 per cent for Malaysia and 61 per cent for China.2 However, the greater interconnection has also provided greater and faster channels of propagation of adverse external shocks. Because production is internationally diversified, adverse external shocks...

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