Supply Shocks and On-shoring: Evidence of recent shifts in trade-flows using an AI-built Production Network

Abstract

This paper studies supply shocks and their role in industrial transformation via `on-shoring'. We study a number of exogenous trade-events including blockades, sanctions, trade-wars, and supply shortages.  To test for onshoring, we first construct a novel network representation of the production network which links the universe of Harmonized System (HS) products. This is built entierly with text-data, using a powerful large language model (LLM) trained on production-specific information.  This approach has many attractive properties relative to networks built using observed transactions data i.e. overcoming issues of data availability, data granularity, and endogenous network structures. With this novel network,  along with trade-flow data, we use a dyadic difference-in-difference (DyDiD) estimation strategy, exploiting various supply-shocks.  We find strong evidence that when a downstream product is hit by a negative import supply-shock, this induces positive import demand for vertically linked upstream products, suggestive of `on-shoring'.  This effect is robust to a host of controls and placebo tests, and is strongest for critical upstream capital equipment.

Speaker: Thiemo Fetzer, Professor of Economics at University of Warwick and University of Bonn

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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