## 1.      Recent international developments pose potentially sizable downside risks to the

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---

### Trade and supply chain links
- The Czech Republic is a small open, export-oriented economy. In 2017:
  - Exports-to-GDP ratio was nearly 0.8.
  - Imports-to-GDP ratio was about 0.7.
  - Exports were concentrated in industrial and electrical machinery and motor vehicles.
- Main export destinations (percent shares shown in figures): DEU, SVK, POL, GBR, FRA, AUT, ITA, HUN, ESP, NLD, Others. (Figure labels show 33% for top grouping and 26% for others in source figures.)
- Main import sources (percent shares shown in figures): DEU, CHN, POL, SVK, ITA, NLD, FRA, AUT, KOR, USA, Others. (Figure labels show 30% for top grouping and 25%/15%/7% etc. in source figures.)

### GVC measurement and participation
- Data and methods:
  - Use TiVA Table (covers 64 countries and 36 sectors); 2015 is the most recent year available in TiVA for this analysis.
  - Backward linkage = share of foreign value-added in gross exports.
  - Forward linkage = domestic value-added in foreign exports as a share of gross exports.
  - GVC participation = forward linkage + backward linkage.
- Key metrics for the Czech Republic (TiVA, 2015):
  - Backward linkage = 0.40 (higher than the average of the EU 28).
  - Forward linkage = 0.19 (higher than the average of the EU 28).
  - GVC participation ≈ 0.59 of gross exports.
  - Net gains (forward/backward ratio) = 0.50 (below EU 28 average of 0.60).
- Comparative observations:
  - Advanced economies (US, UK, Japan) and primary commodity exporters (Norway, Russia) have low backward linkages.
  - Advanced economies and primary commodity producers tend to have high forward linkages and high net gains from GVC participation.

### Sectoral GVC details and services contribution
- Highest GVC participation through exports: electrical and optical equipment sector and transport equipment sector.
- In most sectors backward linkage contributes more to GVC participation than forward linkage.
- Construction and mining and quarrying are exceptions where forward and backward linkages contribute equally.
- Services contribution to value-added in gross exports:
  - EU 28 averages: share of services in gross exports ≈ 0.41; share of services in domestic value-added of exports ≈ 0.45.
  - Czech Republic: share of services in gross exports = 0.23; share of services in domestic value-added of exports = 0.31.
  - The Czech Republic’s services shares are among the lowest of advanced countries in Europe.

### Channels of external shocks and methodological framework
- Three channels through which external shocks affect demand for Czech products:
  - Direct channel: lower demand for Czech goods due to lower demand or higher prices in destination country.
    - Example CES aggregator for varieties: q_t(φ) = Y_t p_t(φ)^(-σ) P_t^(1−σ).
    - An ‘x’ percent drop in German gross output results in an ‘x’ percent drop in demand and reduces output and value-added of sector i by x * exp(export_ij).
    - Tariff shock modeled as x = τ * α where α is elasticity of demand w.r.t. tariffs; literature: α ∈ [0.2,1.5]; analysis assumes α = 1.5.
  - Second-round channel: lower demand for Czech intermediates within the Czech Republic from sectors exporting to the affected country; output and gross value-added decline proportional to x and intermediate linkages.
  - Indirect channel: lower demand for Czech intermediates exported to other countries that then export to the affected country; quantify via weighted average drop μ and export linkages.

### Scenario analyses and impacts
- Lower output in Germany:
  - Germany is the main trading partner:
    - Destination for one third of Czech exports in goods.
    - Destination for over a fifth of Czech exports in services.
    - Source for nearly a quarter of Czech imports in goods and services.
  - Sectoral exposure:
    - Manufacturing of machinery and transportation vehicles export over 30% of their products to Germany and import over 20% of intermediates from Germany.
    - Most goods-producing sectors are highly reliant on Germany for both exports and imports; services exposure is more dispersed and import dependency often exceeds export dependency.
  - Simulation: A hypothetical decline of 1 percent in German gross output would result in:
    - 0.15 percent drop in Czech gross output (nearly 740 million USD).
      - 0.10 percentage point through direct effects.
      - 0.03 percentage point through second-round effects.
      - 0.02 percentage point through indirect effects.
    - 0.12 percent decline in Czech gross value-added (about 215 million USD).
      - 0.07 percentage point through direct effects.
      - 0.03 percentage point through second-round effects.
      - 0.02 percentage point through indirect effects.
    - Sectoral impacts: motor vehicles sector largest drop in gross output (163 million USD) and gross value-added (31 million USD). Other large losses: manufacturing of machinery and equipment, electrical equipment, fabricated metal products, computer/electronic/optical products.
- Brexit (hard Brexit scenario: UK leaves customs union; tariffs set to WTO MFN ceilings; non-tariff costs increase):
  - Trade shares with UK:
    - UK accounts for 3 percent of Czech imports in goods and 6 percent in services.
    - UK is destination of 5 percent of Czech exports in goods and 6 percent in services.
    - Share of trade with the UK has been stable in recent years.
  - Direct sectoral exposure to UK is limited; sectors with highest UK trade shares do not make large contributions to overall Czech trade flows.
  - Estimated impact under hard Brexit:
    - Czech gross output would drop by 0.84 percent.
      - 0.55 percentage point due to direct effect.
      - 0.19 percentage point due to second-round effect.
      - 0.10 percentage point due to indirect effects.
    - Czech gross value-added would drop by 0.63 percent.
      - 0.38 percentage point due to direct effect.
      - 0.18 percentage point due to second-round effect.
      - 0.07 percentage point due to indirect effects.
    - Sectors with highest losses: manufacturing of motor vehicles, machinery and equipment, rubber and plastic, electronics and computers — driven by ex ante export volumes to the UK and high trade costs imposed after a hard Brexit.
- US-China trade tensions:
  - Treated as increases in tariffs (τ) and non-tariff costs that raise prices faced by Czech exporters; modeled through same direct/second-round/indirect channels described above.

### Hard Brexit: estimated impacts on the Czech Republic
- IMF staff using a Computable General Equilibrium model find that GDP in the Czech Republic drops by nearly 0.77 percent in a hard Brexit scenario.
- The CNB exercise estimates a 1.5 percent drop in GDP in a hard Brexit scenario.
- The CNB attribution: the drop is the result of lower trade, higher tariffs, and lower demand in the EU.
- The framework used here assumes a hard Brexit results only in higher tariffs and that the drop in trade flows and demand in the EU area are consequences of the rise in tariffs.
- Quantified impacts (from this framework):
  - Gross output of the Czech Republic would decrease by 0.84 percent in a hard Brexit scenario.
  - Gross value-added of the Czech Republic would decrease by 0.63 percent in a hard Brexit scenario.
- Channel: the hard Brexit effect is mostly due to direct exposure to the UK.

### US–China trade disputes: exposure and estimated impacts
- Trade shares (2017):
  - China was the source of 13 percent of Czech imports (destination for only 1 percent of Czech exports).
  - The US accounted for 2 percent of Czech imports and 2 percent of Czech exports.
- Tariff changes used in the assessment:
  - 13 percentage point increase in tariffs faced by US products in China (average tariff equivalent).
  - 8 percentage point increase in tariffs faced by Chinese products in the US (average tariff equivalent).
- Direct estimated impacts from the initial tariff hikes:
  - 7 million USD loss in gross value-added in the Czech Republic due to reduced demand for Czech intermediates used in US/China-bound goods.
  - 23 million USD loss in gross output in the Czech Republic from the same channel.
- Indirect impacts via Germany:
  - Because demand in the US and China for German intermediates decreases, Germany’s lower demand for Czech intermediates reduces Czech output/value-added further.
  - Through this Germany-channel, gross output in the Czech Republic drops by 377 million USD.
  - Through this Germany-channel, gross value-added in the Czech Republic drops by 102 million USD.
- Overall effect:
  - The gross output of the Czech Republic falls by nearly 0.1 percent due to the US–China trade disputes.
- Comparative note:
  - US–China trade disputes would affect the Czech economy mainly through German demand; overall impact on the Czech Republic is limited relative to a hard Brexit or a slowdown in Germany.

### Sensitivity to German demand
- A hypothetical 1 percent fall in German demand could result in:
  - 0.15 percent fall in Czech gross output.
  - 0.11 percent fall in Czech gross value-added.

### Methodology and transmission channels
- Data and methods:
  - Input-output tables and network analysis are used to quantify effects and study propagation channels of external shocks to the Czech economy.
- Rationale:
  - Falling trade costs over recent decades—due to advances in transportation and information technologies—enabled greater participation in global value chains (GVCs).
  - The Czech Republic is a small open economy with a high rate of participation in GVCs; supply chain linkages are critical to measure impacts of external shocks.
- Findings on channels:
  - External shocks propagate to the Czech Republic through different channels depending on the shock.
  - A hard Brexit or a slowdown in Germany mostly affects the Czech economy through the direct channel.
  - The US–China trade disputes have a sizably larger effect through Germany (though the overall effect remains limited).

*Source: CZECH REPUBLIC — INTERNATIONAL MONETARY FUND (content unit: 1czeea2019002).*

### 1.      Recent international developments pose potentially sizable downside risks to the

### 1czeea2019002 - 1.      Recent international developments pose potentially sizable downside risks to the

### Trade and supply chain links
- The Czech Republic is a small open, export-oriented economy. In 2017:
  - Exports-to-GDP ratio was nearly 0.8.
  - Imports-to-GDP ratio was about 0.7.
  - Exports were concentrated in industrial and electrical machinery and motor vehicles.
- Main export destinations (percent shares shown in figures): DEU, SVK, POL, GBR, FRA, AUT, ITA, HUN, ESP, NLD, Others. (Figure labels show 33% for top grouping and 26% for others in source figures.)
- Main import sources (percent shares shown in figures): DEU, CHN, POL, SVK, ITA, NLD, FRA, AUT, KOR, USA, Others. (Figure labels show 30% for top grouping and 25%/15%/7% etc. in source figures.)

### GVC measurement and participation
- Data and methods:
  - Use TiVA Table (covers 64 countries and 36 sectors); 2015 is the most recent year available in TiVA for this analysis.
  - Backward linkage = share of foreign value-added in gross exports.
  - Forward linkage = domestic value-added in foreign exports as a share of gross exports.
  - GVC participation = forward linkage + backward linkage.
- Key metrics for the Czech Republic (TiVA, 2015):
  - Backward linkage = 0.40 (higher than the average of the EU 28).
  - Forward linkage = 0.19 (higher than the average of the EU 28).
  - GVC participation ≈ 0.59 of gross exports.
  - Net gains (forward/backward ratio) = 0.50 (below EU 28 average of 0.60).
- Comparative observations:
  - Advanced economies (US, UK, Japan) and primary commodity exporters (Norway, Russia) have low backward linkages.
  - Advanced economies and primary commodity producers tend to have high forward linkages and high net gains from GVC participation.

### Sectoral GVC details and services contribution
- Highest GVC participation through exports: electrical and optical equipment sector and transport equipment sector.
- In most sectors backward linkage contributes more to GVC participation than forward linkage (i.e., sectors source a high share of intermediates from abroad).
- Construction and mining and quarrying are exceptions where forward and backward linkages contribute equally.
- Services contribution to value-added in gross exports:
  - EU 28 averages: share of services in gross exports ≈ 0.41; share of services in domestic value-added of exports ≈ 0.45.
  - Czech Republic: share of services in gross exports = 0.23; share of services in domestic value-added of exports = 0.31.
  - The Czech Republic’s services shares are among the lowest of advanced countries in Europe.

### Channels of external shocks and methodological framework
- Three channels through which external shocks affect demand for Czech products:
  - Direct channel: lower demand for Czech goods due to lower demand or higher prices in destination country.
    - Example CES aggregator for varieties: q_t(φ) = Y_t p_t(φ)^(-σ) P_t^(1−σ) (variables retained exactly as in source).
    - An ‘x’ percent drop in German gross output results in an ‘x’ percent drop in demand and reduces output and value-added of sector i by x * exp(export_ij) (equations shown in source).
    - Tariff shock modeled as x = τ * α where α is elasticity of demand w.r.t. tariffs; literature: α ∈ [0.2,1.5]; analysis assumes α = 1.5 (upper bound).
  - Second-round channel: lower demand for Czech intermediates within the Czech Republic from sectors exporting to the affected country; output and gross value-added decline proportional to x and intermediate linkages (formulas shown in source).
  - Indirect channel: lower demand for Czech intermediates exported to other countries that then export to the affected country; quantify via weighted average drop μ and export linkages (formulas shown in source).

### Scenario analyses and impacts
- Lower output in Germany:
  - Germany is the main trading partner:
    - Destination for one third of Czech exports in goods.
    - Destination for over a fifth of Czech exports in services.
    - Source for nearly a quarter of Czech imports in goods and services.
  - Sectoral exposure:
    - Manufacturing of machinery and transportation vehicles export over 30% of their products to Germany and import over 20% of intermediates from Germany.
    - Most goods-producing sectors are highly reliant on Germany for both exports and imports; services exposure is more dispersed and import dependency often exceeds export dependency.
  - Simulation: A hypothetical decline of 1 percent in German gross output would result in:
    - 0.15 percent drop in Czech gross output (nearly 740 million USD).
      - 0.10 percentage point through direct effects.
      - 0.03 percentage point through second-round effects.
      - 0.02 percentage point through indirect effects.
    - 0.12 percent decline in Czech gross value-added (about 215 million USD).
      - 0.07 percentage point through direct effects.
      - 0.03 percentage point through second-round effects.
      - 0.02 percentage point through indirect effects.
    - Sectoral impacts: motor vehicles sector largest drop in gross output (163 million USD) and gross value-added (31 million USD). Other large losses: manufacturing of machinery and equipment, electrical equipment, fabricated metal products, computer/electronic/optical products.
- Brexit (hard Brexit scenario: UK leaves customs union; tariffs set to WTO MFN ceilings; non-tariff costs increase):
  - Trade shares with UK:
    - UK accounts for 3 percent of Czech imports in goods and 6 percent in services.
    - UK is destination of 5 percent of Czech exports in goods and 6 percent in services.
    - Share of trade with the UK has been stable in recent years.
  - Direct sectoral exposure to UK is limited; sectors with highest UK trade shares do not make large contributions to overall Czech trade flows.
  - Estimated impact under hard Brexit:
    - Czech gross output would drop by 0.84 percent.
      - 0.55 percentage point due to direct effect.
      - 0.19 percentage point due to second-round effect.
      - 0.10 percentage point due to indirect effects.
    - Czech gross value-added would drop by 0.63 percent.
      - 0.38 percentage point due to direct effect.
      - 0.18 percentage point due to second-round effect.
      - 0.07 percentage point due to indirect effects.
    - Sectors with highest losses: manufacturing of motor vehicles, machinery and equipment, rubber and plastic, electronics and computers — driven by ex ante export volumes to the UK and high trade costs imposed after a hard Brexit.
- US-China trade tensions:
  - Treated as increases in tariffs (τ) and non-tariff costs that raise prices faced by Czech exporters; modeled through same direct/second-round/indirect channels described above (specific numerical estimates not provided in the supplied content).

*Source: CZECH REPUBLIC — INTERNATIONAL MONETARY FUND (content unit: 1czeea2019002).*

### 20.      Our results are close to the previous IMF estimates, but sizably smaller than those of

### 20.      Our results are close to the previous IMF estimates, but sizably smaller than those of

### Hard Brexit: estimated impacts on the Czech Republic
- IMF staff using a Computable General Equilibrium model find that GDP in the Czech Republic drops by nearly 0.77 percent in a hard Brexit scenario.
- The CNB exercise estimates a 1.5 percent drop in GDP in a hard Brexit scenario.
- The CNB attribution: the drop is the result of lower trade, higher tariffs, and lower demand in the EU.
- The framework used here assumes a hard Brexit results only in higher tariffs and that the drop in trade flows and demand in the EU area are consequences of the rise in tariffs.
- Quantified impacts (from this framework):
  - Gross output of the Czech Republic would decrease by 0.84 percent in a hard Brexit scenario.
  - Gross value-added of the Czech Republic would decrease by 0.63 percent in a hard Brexit scenario.
- Channel: the hard Brexit effect is mostly due to direct exposure to the UK.

### US–China trade disputes: exposure and estimated impacts
- Trade shares (2017):
  - China was the source of 13 percent of Czech imports (destination for only 1 percent of Czech exports).
  - The US accounted for 2 percent of Czech imports and 2 percent of Czech exports.
- Tariff changes used in the assessment:
  - 13 percentage point increase in tariffs faced by US products in China (average tariff equivalent).
  - 8 percentage point increase in tariffs faced by Chinese products in the US (average tariff equivalent).
- Direct estimated impacts from the initial tariff hikes:
  - 7 million USD loss in gross value-added in the Czech Republic due to reduced demand for Czech intermediates used in US/China-bound goods.
  - 23 million USD loss in gross output in the Czech Republic from the same channel.
- Indirect impacts via Germany:
  - Because demand in the US and China for German intermediates decreases, Germany’s lower demand for Czech intermediates reduces Czech output/value-added further.
  - Through this Germany-channel, gross output in the Czech Republic drops by 377 million USD.
  - Through this Germany-channel, gross value-added in the Czech Republic drops by 102 million USD.
- Overall effect:
  - The gross output of the Czech Republic falls by nearly 0.1 percent due to the US–China trade disputes.
- Comparative note:
  - US–China trade disputes would affect the Czech economy mainly through German demand; overall impact on the Czech Republic is limited relative to a hard Brexit or a slowdown in Germany.

### Sensitivity to German demand
- A hypothetical 1 percent fall in German demand could result in:
  - 0.15 percent fall in Czech gross output.
  - 0.11 percent fall in Czech gross value-added.

### Methodology and transmission channels
- Data and methods:
  - Input-output tables and network analysis are used to quantify effects and study propagation channels of external shocks to the Czech economy.
- Rationale:
  - Falling trade costs over recent decades—due to advances in transportation and information technologies—enabled greater participation in global value chains (GVCs).
  - The Czech Republic is a small open economy with a high rate of participation in GVCs; supply chain linkages are critical to measure impacts of external shocks.
- Findings on channels:
  - External shocks propagate to the Czech Republic through different channels depending on the shock.
  - A hard Brexit or a slowdown in Germany mostly affects the Czech economy through the direct channel.
  - The US–China trade disputes have a sizably larger effect through Germany (though the overall effect remains limited).

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1czeea2019002.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1czeea2019002.pdf_