Tariff Shocks: The Role of Value Chains in Europe

IMF Blog, July 3, 2019

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Authors: Raju Huidrom, Carlos Mulas-Granados, Laura Papi, Emil Stavrev
Publication date: July 3, 2019
Europe’s manufacturing is highly integrated through global value chains; different stages of manufacturing are dispersed among several countries.
Almost 70 percent of European exports are linked to value chains.

Gross export measures record the total value of shipments (for example, a Volkswagen assembled in Bratislava recorded as a Slovak export to Germany).
Value-added exports allocate the contribution of upstream suppliers and assembly to the final product’s value.
Example statistic: exports of other European countries to Germany are 8.3 percent of GDP in gross terms but only 2.9 percent of GDP in value-added terms.

Gross exports of cars and parts from the European Union to the United States: 0.3 percent of EU GDP.
Estimated EU output loss taking supply chain linkages into account: 0.1 percent of GDP.
Distribution of impact:
- Only half the impact is in sectors and countries directly affected.
- The remainder is transmitted via other sectors and trading partners along supply chains.
- Losses are distributed across more European countries than gross export data alone would indicate.
Case example: The Czech Republic has negligible direct gross exports of cars and parts to the United States, yet in value-added terms would rank fourth among European economies most hurt by car tariffs.

Growth spillovers from the United States and China are sizable for Europe, with larger effects on economies more exposed via value-added exports.
A growth shock originating in Germany has a smaller estimated impact, likely reflecting:
- Germany’s smaller size relative to the United States and China.
- Germany’s open and diverse economy being relatively resilient in the post-1995 period analyzed.
Caveat: Germany can transmit shocks originating elsewhere, and its impact might be larger if growth were driven more by domestic demand (for example, around the reunification of East and West Germany in 1990).

Measuring exports through value-added indicators provides a more precise picture of the distributional impact of potential trade shocks.
Understanding how trade shocks propagate through value chains can:
- Help formulate offsetting measures.
- Inform policies to help the people most likely to be affected.

IMF Blog — Tariff Shocks: The Role of Value Chains in Europe (Raju Huidrom, Carlos Mulas-Granados, Laura Papi, Emil Stavrev; July 3, 2019).