13 | DECEMBER 2019

By Carlos Mulas-Granados, European Department of the International Monetary Fund¹

The Czech Republic exports only a small number of cars and car parts directly to the United States, but we expect it to lose significantly in a potential scenario in which the United States imposes tariffs on cars. Why is that? The key to this puzzle is the extensive supply chains that dominate the production of European cars and many other products. The explanation is simple: while direct exports of cars and car parts from the Czech Republic to the United States are small, the Czech Republic exports a significant amount of car parts to other European countries, which in turn export to the United States. Hence, in our recent paper, we analyze the possible impact of trade tensions taking fully into account these supply chain linkages.²

Because Europe is deeply integrated into global value chains (GVCs), recent trade tensions have raised the broader question of how all European economies would be affected by the potential introduction of tariffs or other trade barriers. Almost 70 percent of total European exports are linked to supply chains (Figure 1), and therefore shocks affecting existing trade flows between the major trade hubs—the United States, China, and Germany—could affect European economies through those supply chain linkages.

Our recent IMF study shows that distinguishing between traditional gross export measures and value-added exports is especially important for Europe in the aggregate because the difference between the two is large. As an example, when a German resident buys a Volkswagen model shipped from the car plant in Bratislava (Slovak Republic), this is recorded in gross terms as a Slovak export to Germany. But that car may have just been assembled in the Slovak factory while many of its high value-added components (for example, engine parts) may come from third countries which provide a higher share of the value added to the final product. This is what explains, for example, that 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. Hence, estimating the impact of trade shocks using value-added measures offers a more accurate picture of the costs across European countries associated with trade disputes.

To illustrate the importance of value-added measures of trade, we use a potential scenario in which the United States imposes a 25 percent tariff on imports of cars and car parts. European gross exports of cars and car parts to the United States in percent of GDP are 0.3 percent of EU GDP (Figure 2.1). The subsequent output losses for the EU are estimated at 0.1 percent of GDP taking into account supply chain linkages—an impact which could be significantly larger if market and confidence effects are incorporated. Only half of the impact of the US tariff shocks would occur in the sectors and countries directly affected by higher tariffs. The rest would be transmitted via other sectors and trading partners, which are part of the existing supply chains. This analysis shows that the losses are distributed across more European countries than gross export data would suggest. Consider once again, the case of the Czech Republic. Direct exports of cars and car parts from the Czech Republic to the United States are so small that they do not appear in Figure 2.1. Thus, analyses relying on traditional trade statistics would suggest that the Czech Republic may be largely immune to increases in US car tariffs. However, after taking into account supply chain linkages, the Czech Republic is estimated to be the 4th most affected country by car tariffs in all of Europe in terms of GDP (Figure 2.2), since a large amount of the Czech Republic’s value-added is embodied in other countries’ car exports to the United States.

Distribution of Loss from US Tariffs on Imports of Car and Car Parts

Figure 2.1 Car and Car Parts Gross Exports to the USA, 2017
(Percent of GDP)

Figure 2.2 Distribution of Loss from US Tariffs on Imports of Cars and Car Parts, 2017
(Percent of GDP)

Our study also looks at growth spillovers originating in the three world trade hubs, United States, China, and Germany, and how they could affect Europe through GVCs. Our main conclusion is that growth spillovers from the United States and China to European economies are sizable with larger effects for those economies that are more exposed to them in terms of value-added exports. Spillover effects from growth shocks originating in Germany on other European countries are estimated to be smaller. This likely reflects the smaller size of the German economy relative to the United States and China, and the fact that during the period studied Germany has not been an independent source of large shocks. However, Germany can be a transmitter of shocks originating elsewhere. Also, Germany’s spillover might become larger when its growth is more driven by domestic demand, such as during the period around reunification.

The findings of this paper could be helpful for policymakers. Measuring exports through value-added indicators gives a more precise picture of the distributional impact of potential trade shocks. Relatedly, a better understanding of how trade shocks propagate through GVCs could help calibrate offsetting measures as needed and target social policies aimed at those citizens most likely to be affected.

Newsletter n. 13| December 2019 - Download PDF