Essays on Production Networks and International Trade Policy
Restricted (Penn State Only)
- Author:
- Lopez Espino, Adriana
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- November 01, 2024
- Committee Members:
- Reka Albert, Outside Unit & Field Member
Barry Ickes, Program Head/Chair
Marc Henry, Co-Chair & Dissertation Advisor
Fernando Parro, Major Field Member
Stephen Yeaple, Major Field Member
James Tybout, Co-Chair & Dissertation Advisor - Keywords:
- international trade
rules of origin
production networks
global value chains - Abstract:
- Free Trade Agreements (FTAs) give firms within the member countries duty-free access to each other’s markets. But with a catch. Non-bloc workers and capitalists are the primary beneficiaries if these firms rely heavily on suppliers outside the bloc for their upstream inputs. So, to limit this diversion of factor demand, FTAs include elaborate rules—known as Rules of origin (RoOs)—that dictate how much of a product’s value must be created within the bloc for it to be “in compliance,” i.e., enjoy duty-free access to member country markets. Because value chains are often lengthy, it is difficult to discern which firms RoOs favor, which firms they penalize, and by how much. I use comprehensive value-added tax records from Mexico to shed new light on these issues. In particular, I study the effects of the North American Free Trade Agreement (NAFTA) and its replacement, the United States-Mexico-Canada Agreement (USMCA), on the Mexican automotive sector. Four main findings emerge. First, Mexican auto sector value chains exhibit strong interconnectedness, with 21 percent of domestic firms serving two or more assemblers and contributing to a fifth of the transaction volume. Second, when the USMCA replaced NAFTA, car assemblers were the most affected group within the value chain. These firms experienced a threefold decrease in compliance rates compared to the average firm in the value chain. Third, however, the steep increase in regional content requirements (RCRs) was alleviated by a new "super-core roll-up" provision, which allowed some producers to round up their suppliers’ domestic content to 100 percent. Finally, if the super-core roll-up provision had not been implemented, the fraction of Mexican assemblers qualifying for duty-free treatment within the bloc would have halved. Instead, the qualifying fraction dropped by only 15 percentage points. The last part of this dissertation develops a structural framework to study the interactions between trade policy and global value chains (GVCs), viewing the world economy as a production network. The proposed model integrates firm-to-firm trade into a many-to-many matching game with transfers to endogenize the production network, allowing firms to make decisions along both extensive and intensive margins. Using recent contributions from the matching literature, the framework incorporates a new equilibrium notion in which the production network is chain stable. This approach captures economic interdependencies, adjustments, and welfare impacts that simpler models may miss, highlighting the importance of considering network interdependencies in certain scenarios while also identifying areas where simpler models may suffice. The findings provide guidance for future research on trade policy and GVCs, particularly in the context of Free Trade Agreements (FTAs) and their impact on specific industries and parts of the global production network.