WORKING PAPERS

• Trade Policy and Global Sourcing: An Efficiency Rationale for Tariff Escalation

  November 2023

  NBER Working Paper 30225 (with Pol Antràs, Agustín Gutiérrez, and Felix Tintelnot)  
  Accepted by Journal of Political Economy Macroeconomics

  Link to paper
  Online Appendix

  View Abstract
  Import tariffs tend to be higher on final goods than inputs, a phenomenon commonly referred to as tariff escalation. Despite its salience, existing trade policy results do not predict that tariff escalation increases social welfare. We show that tariff escalation is often welfare-improving when final-good production occurs under increasing returns to scale. In our model, a country can export inputs directly, or by embodying them into exports of final goods. The latter raises welfare when final-good efficiency is increasing in sector size, and a final-good production subsidy or import tariff are equally effective in exploiting this benefit. When import tariffs are the only policy tools, this force generally dominates other motives for an input tariff, leading to a disproportionately large tariff on final goods. We calibrate our model and show that in such second-best settings, tariff escalation maximizes welfare for empirically relevant parameter values whenever the returns to scale for final goods are at least as large those for inputs. A quantitative evaluation of the US-China trade war demonstrates that any welfare gains are overwhelmingly driven by final-good tariffs.

• Exporting, Global Sourcing, and Multinational Activity: Theory and Evidence from the United States

  July 2023

  NBER Working Paper 31488 (with Pol Antràs, Evgenii Fadeev, and Felix Tintelnot)   
  Conditionally accepted by Review of Economics and Statistics
  Link to paper
  Slides
  BFI Summary
  This is an updated version of "Global Sourcing and Multinational Activity: A Unified Approach," NBER WP 30450.  See longer version for model with demand complementarities or substitutes across plants.

  View Abstract
  Multinational firms (MNEs) dominate trade flows, yet their global production decisions are often ignored in firm-level studies of exporting and importing. Using newly merged data on US firms' trade and multinational activity by country, we show that MNEs are more likely to trade not only with countries in which they have affiliates, but also with other countries within their affiliates' region. We rationalize these patterns with a new source of firm-level scale economies that arises when country-specific fixed costs to source from, or sell in, a market are shared across all the MNE's plants. These shared fixed costs create interdependencies between a firm's production and trade locations that generate third-market responses to bilateral trade policy changes.

• Heterogeneous Globalization: Offshoring and Reorganization

  January 2023

  NBER Working Paper 26854 (with Andrew B. Bernard, Valerie Smeets, and Frederic Warzynski)
  Link to paper 
  Online Appendix
  Occupations List 
  Survey

  View Abstract
  Trade liberalization with low-wage countries increases competition for domestic producers but also creates new offshore opportunities. This paper finds that firms exploit these opportunities in low-wage countries by sourcing lower-price varieties of the same goods they manufacture at home. Instead of ceasing domestic production of those goods, offshoring firms reorganize their domestic activities by shifting production into higher-price varieties, shedding production workers, and increasing both the share and level of employment in technology occupations. These patterns are consistent with comparative advantage motives for the production of vertically differentiated varieties across countries. Moreover, we show that offshoring-driven low-wage imports are associated with industry-level growth, in contrast to the negative employment effects of competing import flows. This divergence highlights the heterogeneous effects of globalization and calls for incorporating a vertical dimension of product differentiation into frameworks of offshoring.

• Structural Change Within Versus Across Firms: Evidence from the United States

  May 2022

  NBER Working Paper 30127 (with Xiang Ding, Stephen J. Redding, and Peter K. Schott) 
  Link to paper
  Online Appendix
  Vox-EU

  View Abstract
  We document the role of intangible capital in manufacturing firms' substantial contribution to non-manufacturing employment growth from 1977-2019. Exploiting data on firms' "auxiliary" establishments, we develop a novel measure of proprietary in-house knowledge and show that it is associated with increased growth and industry switching. We rationalize this reallocation in a model where firms combine physical and knowledge inputs as complements, and where producing the latter in-house confers a sector-neutral productivity advantage facilitating within-firm structural transformation. Consistent with the model, manufacturing firms with auxiliary employment pivot towards services in response to a plausibly exogenous decline in their physical input prices.

• Redesigning the Longitudinal Business Database

  May 2021

  CES Working Paper 21-08 (with Melissa Chow, Christopher Goetz, Nathan Goldschlag, James Lawrence, Elisabeth Ruth Perlman, Martha Stinson, and T. Kirk White)

  Link to paper

  View Abstract
  In this paper we describe the U.S. Census Bureau's redesign and production implementation of the Longitudinal Business Database (LBD) first introduced by Jarmin and Miranda (2002). The LBD is used to create the Business Dynamics Statistics (BDS), tabulations describing the entry, exit, expansion, and contraction of businesses. The new LBD and BDS also in- corporate information formerly provided by the Statistics of U.S. Businesses program, which produced similar year-to-year measures of employment and establishment flows. We describe in detail how the LBD is created from curation of the input administrative data, longitudinal matching, retiming of economic census-year births and deaths, creation of vintage consistent industry codes and noise factors, and the creation and cleaning of each year of LBD data. This documentation is intended to facilitate the proper use and understanding of the data by both researchers with approved projects accessing the LBD microdata and those using the BDS tabulations.

• Imputing Missing Values in the US Census Bureau's County Business Patterns

  January 2021

  NBER Working Paper 26632 (with Fabian Eckert, Peter Schott, and Natalie Yang)
  Link to paper

  View Abstract
  The County Business Patterns data published by the US Census Bureau track employment by county and industry from 1946 to the present. Two features of the data limit their usefulness to researchers: (1) employment for the majority of county-industry cells is suppressed to protect confidentiality, and (2) industry classifications change over time. We address both issues. First, we develop a linear programming method that exploits the large set of adding-up constraints implicit in the hierarchical arrangement of the data to impute missing employment. Second, we provide concordances to map all data to a consistent set of industry codes. Finally, we construct a user-friendly, 1975 to 2018 county-level panel that classifies industries according to a consistent set of 2012 NAICS codes in all years.

• Colocation of Production and Innovation: Evidence from the United States

  December 2020

  (with Wolfgang Keller, Peter K. Schott, Stephen Yeaple, and Nikolas Zolas) 
  Link to paper

  View Abstract
  Manufacturers perform the majority of US patenting and R&D. The decades-long decline of US manufacturing employment raises concerns that US innovation will follow. We investigate the relationship between between physical production and innovation by constructing a new dataset linking all US firms and their establishments to location geocodes and innovative activities. Preliminary results indicate that while firms with both manufacturing and innovation establishments exhibit higher patenting when these facilities are more spatially proximate, manufacturing firms' overall contribution to US innovation declines steadily and substantially over time. Moreover, cohorts of firms permanently exiting manufacturing in the 1990s and 2000s continue to patent at their prior pace.

• The Effects of Industry Classification Changes on US Employment Composition

  June 2018

  CES Working Paper 18-28 (with Shawn Klimek)

  Link to paper

  View Abstract
  This paper documents the extent to which compositional changes in US employment from 1976 to 2009 are due to changes in the industry classification scheme used to categorize eco- nomic activity. In 1997, US statistical agencies began implementation of a change from the Standard Industrial Classification System (SIC) to the North American Industrial Classification System (NAICS). NAICS was designed to provide a consistent classification scheme that consol- idated declining or obsolete industries and added categories for new industries. Under NAICS, many activities previously classified as Manufacturing, Wholesale Trade, or Retail Trade were re-classified into the Services sector. This re-classification resulted in a significant shift of mea- sured activities across sectors without any change in underlying economic activity. Using a newly developed establishment-level database of employment activity that is consistently clas- sified on a NAICS basis, this paper shows that the change from SIC to NAICS increased the share of Services employment by approximately 36 percent. 7.6 percent of US manufacturing employment, equal to approximately 1.4 million jobs, was reclassified to services. Retail trade and wholesale trade also experienced a significant reclassification of activities in the transition.

PUBLICATIONS

• The Changing Firm and Country Boundaries of US Manufacturers in Global Value Chains

  August 2023

  Journal of Economic Perspectives, 2023. 37(3): 31-58. 
  Link to Paper
  Slides

  View Abstract
  This paper documents how US firms organize goods production across firm and country boundaries. Most US firms that perform physical transformation tasks in-house using foreign manufacturing plants in 2007 also own US manufacturing plants; moreover manufacturing comprises their main domestic activity. By contrast, “factoryless goods producers” outsource all physical transformation tasks to arm's-length contractors, focusing their in-house efforts on design and marketing. This distinct firm type is missing from standard analyses of manufacturing, growing in importance, and increasingly reliant on foreign suppliers. Physical transformation “within-the-firm” thus coincides with substantial physical transformation “within-the-country,” whereas its performance “outside-the-firm” often also implies “outside-the-country.” Despite these differences, factoryless goods producers and firms with foreign and domestic manufacturing plants both employ relatively high shares of US knowledge workers. These patterns call for new models and data to capture the potential for foreign production to support domestic innovation, which US firms leverage around the world.

• New Perspectives on the Decline of US Manufacturing Employment

  March 2018

  Journal of Economic Perspectives, 2018. 32(2): 47-72. (with Justin Pierce and Peter Schott) Featured in the Financial Times, Jan 2019 (link).
  Published Version  
  Link to paper  
  Online appendix
  Slides  
  Vox-EU  
  2018 Globalization and Inequality BFI Conference

  View Abstract
  We use relatively unexplored dimensions of US microdata to examine how US manufacturing employment has evolved across industries, firms, establishments, and regions from 1977 to 2012. We show that these data provide support for both trade- and technology-based explanations of the overall decline of employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism. Toward that end, we discuss how further analysis of these trends might yield sharper insights.

• The Margins of Global Sourcing: Theory and Evidence From US Firms

  September 2017

  American Economic Review, 2017. 107(9): 2514-64. (with Pol Antràs and Felix Tintelnot) 

  Published Version
  Link to paper
  Online appendix 
  Vox-EU

  View Abstract
  This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.

• Factoryless Goods Producers in the US

  May 2017

  in L. Fontagne and A. Harrison (eds.), The Factory-Free Economy (chapter 5). Oxford University Press, 2017. (with Andrew Bernard) Featured in the Washington Post's Wonkblog,  Sep 2013 (link); the Wallstreet Journal, Mar 2014 (link).
  Link to paper

  View Abstract
  This paper documents the extent and characteristics of plants and firms in the US that are outside the manufacturing sector according to official government statistics but nonetheless are heavily involved in activities related to the production of manufactured goods. Using new data on establishment activities in the Census of Wholesale Trade conducted by the US Bureau of the Census in 2002 and 2007, this paper provides evidence on so-called “factoryless goods producers” (FGPs) in the US economy. FGPs are formally in the wholesale sector but, unlike traditional wholesale establishments, FGPs design the goods they sell and coordinate the production activities. This paper documents the extent of FGPs in the wholesale sector and how they differ from traditional wholesalers in terms of their employment, wages, productivity and output. Reclassifying FGP establishments to the manufacturing sector using our definition would have shifted at least 595,000 workers to as many as 1,311,000 workers from wholesale to manufacturing sectors in 2002 and at least 431,000 workers to as many as 1,934,000 workers in 2007.

• Technology and Production Fragmentation: Domestic versus Foreign Sourcing

  April 2017

  Review of Economic Studies, 2017. 84(2): 650-687.  Previously circulated as “Breaking up is hard to do: Why firms fragment production across locations.”
  Published Version  
  NBER WP  
  Online appendix   

  View Abstract
  This article provides direct empirical evidence on the relationship between technology and firms’ global sourcing strategies. Using new data on U.S. firms’ decisions to contract for manufacturing services from domestic or foreign suppliers, I show that a firm’s adoption of communication technology between 2002 and 2007 is associated with a 3.1 point increase in its probability of fragmentation. The effect of firm technology also differs significantly across industries; in 2007, it is 20% higher, relative to the mean, in industries with production specifications that are easier to codify in an electronic format. These patterns suggest that technology lowers coordination costs, though its effect is disproportionately higher for domestic rather than foreign sourcing. The larger impact on domestic fragmentation highlights its importance as an alternative to offshoring, and can be explained by complementarities between technology and worker skill. High technology firms and industries are more likely to source from high human capital countries, and the differential impact of technology across industries is strongly increasing in country human capital.

• Factoryless Goods Producing Firms

  May 2015

  American Economic Review, Papers and Proceedings, 2015. 105, 518-23. (with Andrew Bernard)
  Link to Paper

  View Abstract
  This paper documents the existence and characteristics of US firms that do not manufacture themselves, but nonetheless are heavily involved in the production of goods. These factoryless goods producing firms (FGPFs) are formally in the wholesale sector but, unlike traditional wholesale firms, FGPFs design the goods they sell and coordinate production activities. FGPFs in the wholesale sector are larger and younger, pay higher wages, span more sectors and had more manufacturing employment in previous years compared to traditional wholesalers. FGPFs are more likely to import than typical wholesalers, though their imports constitute a smaller share of their total domestic activity.

• How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size

  October 2013

  IMF Economic Review, 2013. 61, 520-559.  (with John Haltiwanger, Ron Jarmin, and Javier Miranda) Featured in The NBER Digest, Oct 2013 (link).
  Link to paper
  Online Appendix

  View Abstract
  There remains considerable debate in the theoretical and empirical literature about the differences in the cyclical dynamics of firms by firm size. This paper contributes to the debate in two ways. First, the key distinction between firm size and firm age is introduced. The evidence presented in this paper shows that young businesses (that are typically small) exhibit very different cyclical dynamics than small/older businesses. The second contribution is to present evidence and explore explanations for the finding that young/small businesses were hit especially hard in the Great Recession. The collapse in housing prices accounts for a significant part of the large decline of young/small businesses in the Great Recession.

OTHER WRITING

• A Satellite Account to Measure the Retail Transformation: Organizational, Conceptual, and Data Foundations

  April 2021

  Consensus Study Report for the National Academies of Science, Engineering, Medicine 

  Prepublication Report