The Transmission Mechanism of Financial Shocks
Edited by Satoshi Inomata
Chapter 3: International Trade and Real Transmission Channels of Financial Shocks in Global Production Networks: An Asian–USA Perspective
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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