Tracking the effects of trade shocks

By Alvin Lee

SMU Office of Research Governance & Administration – The global trading system has experienced unprecedented volatility since the Trump administration enacted reciprocal tariffs in April, forcing multinational enterprises (MNEs) to adjust their production strategies. American industrial giant Boeing is exploring other markets to cope with China’s retaliatory 125-percent tariffs on goods from the US, while Honda and LG are considering moving some production to the United States to sidestep the US’s additional 145-percent import tariffs on goods from China. 

Some Chinese companies, such as fashion label Shein, are shifting production out of China to the U.S. for similar reasons. The Nanjing-founded company, now headquartered in Singapore, generated US$38 billion in revenue in 2024 and is the primary source of business for a network of factories and related enterprises in the southern Chinese city of Guangzhou. These so-called “Shein villages” consist of related businesses such as garment manufacturers, design studios, quality control firms, and logistics services. The economic fallout of Shein upping sticks would be considerable, which has spurred the Chinese government to dissuade the company from doing so.

How can one quantify the knock-on effects of a strategic entity such as Shein leaving? How do the shocks from a trade war transmit through an economy? Conversely, how can one measure the positive effects that an MNE may bring to the local economy, including the innovation spillovers, the productivity gains, and the potential increase in local labour demand?

The research

Those elements form the bulk of Associate Professor of Economics Chang Pao-Li’s project, “Role of Firm-to-Firm Input-Output Linkages in Transmitting Aggregate Shocks: Impacts on Firm-Level Productivity, Labor Demand, and Innovation”. Professor Chang recently clinched a Ministry of Education (MOE) Academic Research Fund (AcRF) Tier 3 grant for the project, which seeks to understand “the mechanisms through which global shocks (such as trade wars and supply chain disruptions) propagate across firms' linkages”.

Simply explained, firm-to-firm linkages can be measured by tracing one firm’s transactions with its suppliers and customers, thereby accounting for the inflow and outflow of merchandise, services, and funds. 

With support and data from DBS and government agencies such as the Ministry of Trade and Industry (MTI), the project “aim(s) to compile the firm-to-firm input-output linkages for the Singapore economy,” explains Professor Chang, who is also Associate Dean of Research and Industry Engagement.

“By combining business-to-business transaction data with the government administrative data on firm-level activities (revenue, profit, capital, labour inputs etc.), and further merging them with worker-level data from the Ministry of Manpower (MoM) and Central Provident Fund (CPF), we can study how shocks propagate through the firm-to-firm input-output linkages to affect firm-level productivity and labour demand.” 

Tracking firm-to-firm data helps in understanding the mechanics of the production network in an economic area. Professor Chang mentions Japanese studies that look at how the Shinkansen creates new links for firms and positive knock-on effects for local economies served by the high-speed railway, as well as Costa Rican firm-to-firm data that illustrates productivity gains and increased labour demand stemming from the presence of MNEs in the local economy. 

“By looking at firm-level data, we can trace the changes to labour demand for first-time suppliers to MNEs,” Professor Chang tells the Office of Research. “The presence of MNEs in a local market will also pull up the average wage, simply because of the compositional change in demand [for higher value jobs]. The local firms become more productive, they hire more workers, and they will also pay their existing workers better. There are fixed costs to hiring new workers, so companies would rather pay more to keep existing workers who now have better options in the form of MNEs.”

Professor Chang further explains that SMU will contribute data on patent creation and citation, sourced from the United States Patent and Trademark Office (USPTO) and others, and merge them with the Singapore firm-level data to quantify the effects of global shocks on the production network and innovation spillover. 

Professor Chang elaborates: “We understand that innovation activities are quite concentrated among bigger firms. Therefore, this will be related to how MNEs in Singapore may play a role in creating knowledge that is transmitted to local customers or supplying firms. We are interested in understanding how the goods/services flow is connected with the knowledge flow. Thus, in the first stage, for this part of the project, we plan to identify and characterise the elasticity of idea flows to goods flow.

“Following that, we plan to build structural models to study the mechanism of network formation and knowledge flow. In this setup, connections to a new partner bring in an additional layer of benefit on top of goods/services exchange: high-productivity partners enable a higher chance of productivity upgrading by the current firm. Firms internalise the value of learning in network formation, and in the equilibrium, both the production network and firm productivity distribution are endogenously determined,” she explains, referring to the possibility of firm productivity distribution and the production network structure changing in response to shocks. 

She adds: “In extended frameworks, we plan to incorporate innovation decisions in addition to production decisions, such that firms also endogenously hire knowledge production workers to carry out internal R&D that could lead to productivity gains. In this setup, network formation, productivity distribution, and R&D investments would be jointly determined, thus creating a powerful sandbox to conduct counterfactual analyses.

“This quantitative structural framework will enable us to simulate ‘what-if’ scenarios. We can run counterfactuals to simulate the economic impacts of different shocks, e.g., the scenario where a certain big firm pulls out of the local economy.”

Linking to the global value chains

Pertaining to the Singapore’s links to the global value chains (GVC), Professor Chang explains how backward and forward linkages in GVC are measured. 

“Suppose a one-dollar piece of plastic is exported by Singapore, and it includes 20 cents of Chinese value added, and five cents of Malaysian value added. These foreign contents would be considered backward linkages in Singapore’s exports,” explains Professor Chang. “Forward linkages, on the other hand, capture the Singapore value added that is exported and further embedded in other countries' production or export.’ For example, if the one-dollar piece of plastic consists of 20 cents of Singapore value added and is exported to Taiwan, who then uses the piece of plastic in its production of exports to the U.S., this 20 cents would be considered part of the forward linkages in Singapore’s gross exports. These backward and forward linkages constitute the GVC-related trade. 

“Typically, not all local value added would be further exported by trading partners. Some of them would be embodied in final goods directly consumed by the bilateral trading partners, or they could be embodied in intermediate goods further processed and embedded in foreign local final goods before being consumed locally. These are considered traditional types of trade, and distinguished from the GVC-related trade.”

Professor Chang adds that the inter-country input-output (ICIO) data for computing cross-border linkages are available at the industry level, which can be used to gauge a general picture of the GVC. To better understand the effects of the ongoing trade war on Singapore’s economy, Professor Chang’s work will attempt to track the backward and forward GVC linkages at the firm level, using the compiled firm-to-firm dataset.

“We will try to decompose in a similar way the backward and forward linkages of a firm’s exports,” she says. Conceptually, such decomposition can be executed based on a global firm-level input-output table. However, such data are unavailable due to the confidential nature of firm-to-firm data, which are often limited by national jurisdiction and not portable across economic areas. Thus, in implementing the research ideas, Professor Chang will fuse the ICIO tables at the industry level for all the other countries with the firm-to-firm IO data for the Singapore economy, to arrive at working measures of firm-level backward and forward linkages.

“We can then have firm-level measures of GVC activities, e.g., how intensively a firm participates in GVC in terms of backward and forward linkages, and make a closer connection between the firm's GVC activity and its productivity and labour demand.”

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