Shock transmission, global supply chains, and development: assessing responses to trade shocks

The authors of this staff working paper analyze the impact of various types of trade shocks on the composition of gross production in low, middle, and high-income countries. They examine how policy-driven shocks (such as tariffs) and non-policy-driven shocks (like conflicts and natural disasters) affect intermediate versus final goods components of gross production. The results show that these shocks primarily change the intermediate input component of gross production through indirect and foreign channels. Furthermore, the study reveals that trade protectionism in high-income countries reduces low-income countries' participation in global supply chains, while increasing their domestic input contribution to output at the expense of developing nations. Conversely, trade liberalization in low- and low-middle-income countries increases their level of involvement in global supply chains, with adjustments occurring in high-income countries through increased use of foreign intermediates.