New research from Kyle Handley shows how trade policy uncertainty deters investment needed to integrate global value chains
Trade tensions between the U.S. and China, the COVID-19 pandemic and national security concerns have exposed risks in current global supply chains. The response from governments and firms worldwide has focused on investments to make these supply chains more resilient.
New research from Kyle Handley, associate professor at the UC San Diego School of Global Policy and Strategy, and coauthors shows that policy commitments that reduce uncertainty about future tariffs can make supply chains deeper and more resilient.
“Undermining trade agreements like the World Trade Organization (WTO) and starting trade wars targeting intermediate inputs does the opposite,” Handley explained.
In the paper, Handley and coauthors used China’s accession to the WTO in 2001 as a case study of supply chain integration following a reduction in policy uncertainty.
“Although it occurred more than 20 years ago, the episode highlights the potential impact of more recent trade tensions, such as the U.S.-China trade war, Brexit and the hand-wringing of policymakers over national security and critical supply chain inputs,” Handley explained. “Before abandoning hope of renewed cooperation in this area, we must answer the following: What are the value of WTO commitments along the global supply chain?”
The research shows how trade policy uncertainty deters the investment needed to facilitate integration into global value chains and demonstrates how WTO agreements, by acting as a commitment device, lower this uncertainty and thus encourage investment and integration.
“Our results suggest that the reduced credibility of regional and multilateral trade agreements may have a depressing effect on investment in new intermediate input sourcing decisions,” Handley said. “These effects may persist even after the threats are reduced or resolved, if firms believe future trading environments are less stable and unpredictable.”
Handley and coauthors published a policy brief on Vox EU in February explaining their findings. The full paper is now forthcoming in the July 2024 edition of the Journal of International Economics.
Coauthors include Nuno Limão and Rodney D. Ludema of Georgetown University, and Zhi Yu of Beijing Normal University.