DP13285 | The network origins of the gains from trade

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This paper argues that the determinants of the welfare gains from trade have fundamentally changed with the emergence of a global production network. Towards this end, we study a Ricardian trade model featuring trade in intermediate inputs, and develop a novel comparative statics approach to decompose the total welfare effect of an arbitrary trade cost shock into several meaningful, easily quantifiable, channels. This decomposition uncovers a unique feature of supply chain trade: the gains from trade are not so much determined by a country's access to the technologies and markets of its direct trade partners, but rather by a country's network exposure to countries further up- or downstream in the global production network. We develop a set of simple statistics to measure each country's network exposure, show how it predicts the gains from trade, and identify each country's key trade intermediaries, i.e., countries that primarily determine its network exposure.