Did international production/distribution networks mitigate the effect of the global financial crisis? Evidence from Taiwan machinery industry

Abstract

This study employs survival analysis to investigate how the trade relationships of international production/distribution networks mitigated the negative effects on exports during the global financial crisis of 2008–2009. Using monthly trade data at the most disaggregated level, this study employs January 2009 as the base, which was the worst month of the crisis, to identify whether there were active or inactive trade relationships. We reveal that even in the worst month of the crisis, the country-product pairs had high survival rates for active trade relationships, implying they were major drivers of the recovery of trade values after the crisis.

Keywords:

• Survival analysis
• East Asia
• financial crisis
• international production networks

Notes

1. As shown in Ando and Kimura (2005), the main actors participating in regional production networks in East Asia are machinery trade.

2. Paprzycki and Ito (2010) indicate that liberalization and regional integration have been concentrated because of electric machinery.

3. Okubo, Kimura, and Teshima (2014) decompose country-product pairs into four types in the crisis period: stay, exit, re-entry, and new entry.

4. Ando (2010) indicates production networks are affected by the shock of the financial crisis, however, trade has rapidly recover in East Asia through regional production networks.

5. Our sample excludes new trade relationships which are defined new-entry of country pairs appeared after the start of the financial crisis. Although they also play important roles in helping recover trade values in exports, we have at least two reasons to exclude them from our sample. First, it is not meaningful to estimate survival rates for new trade relationships based on the Kaplan–Meier estimator of survival analysis. Inversely, Okubo, Kimura, and Teshima (2014) investigate the probability of new-entry during the financial crisis and evidence parts and components trade has a higher probability of survival. Second, the aim of our study is to research duration of trade relationships which are impacted drastically during the period of financial crisis. As for the sample which is not experienced the significant shock of trade relationships is beyond the scope of this paper.

6. The trading partners in this study consist of 36 countries, such as Cambodia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Thailand, Vietnam, India, Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom, Romania, Greece, Slovakia, Czech Republic, Hungary, Norway, Poland, Switzerland, Bulgaria, Ireland, Canada, United States, and are divided into three regions as, East Asia, EU and North America.

7. Indeed, trade relationships are getting to seriously broken off over time during the period of financial crisis. Nevertheless, it is difficult to choose the timing of disruption because the disruption of trade relationships for each country-product pair may not be consistent. What we did here is to choose the timing of research at the worst month within whole crisis period. A similar strategy employed is in Ando and Kimura (2012).

8. The exports of parts and components with East Asia in September 2009 were 6849 million dollars, similar to the average level in September 2008 (6834 million dollars).

9. The definition of the extensive margin in this study is followed with Hummels and Klenow (2005).

10. The trade relationships in January 2010 include continued, re-entry, and new-entry country-products pairs. Nevertheless, Table 1 shows that continued and discontinued trade relationships in the worst month of the crisis period (January 2009) are affected significantly relative to the same period in the last/next year.

11. Taiwan’s machinery trade in exports recovered sharply to the before-the-crisis level in September 2009 (10,208 million dollars). It experienced the crisis but still had active trade relationships in January 2009, which account for the most trade values, with a proportion of 50.4% in September 2009; the non-active trade relationships in January 2009 represent only 0.01%. Another important contributor to the recovery of trade values is represented by new-entry trade relationships, which have not appeared before January 2009 and accounted for a proportion of 32.8%. However, our major goals focus on the trade relationships that were shaken by the crisis. Therefore, the discussion regarding new-entry trade relationships is beyond the scope of this paper.

12. Following Ando and Kimura (2005), the definition of machinery parts and components of HS classification are presented as follows: 8406, 8407, 8408, 8409, 8410, 8411, 8412, 8413, 8414, 8416, 8417, 8431, 8448, 8466, 8473, 8480, 8481, 8482, 8483, 8484, 8486, 8487, 8503, 8505, 8507, 8511. 8512, 8522, 8529, 8531, 8532, 8533, 8534, 8535, 8536, 8537, 8538, 8539, 8540, 8541, 8542, 8544, 8545, 8546, 85,478,548, 8607, 8706, 8707, 8708, 8714, 8803, 8805, 9001, 9002, 9003, 9013, 9014, 9033, 9104, 9110, 9111, 9112, 9113, 9114, 9209, 840,140, 840,290, 840,390, 840,490, 841,520, 841,590, 841,891, 841,899, 841,990, 842,091, 842,099, 842,123, 842,129, 842,131, 842,191, 842,199, 842,290, 842,390, 842,490, 843,290, 843,390, 843,490, 843,590, 843,691, 843,699, 843,790, 843,890, 843,991, 843,999, 844,090,844,190, 844,240, 844,250, 844,391, 844,399, 845,090, 845,190, 845,240, 845,290, 845,390, 845,490, 845,590, 846,791, 846,792, 846,799, 846,890, 847,490, 847,590, 847,690, 847,790, 847,890, 847,990, 850,490, 850,690, 850,870, 850,990, 851,090, 851,390, 851,490, 851,590. 851,690. 851,770, 851,840, 851,850, 851,890, 852,352, 853,090, 854,390, 870,990, 871,690, 900,590, 900,691, 900,699, 900,791, 900,792, 900,890, 901,090, 901,190, 901,290, 901,590. 901,790, 902,490, 902,590, 902,690, 902,790, 902,890, 902,990, 903,090, 903,190, 903,290.

13. In order to reveal the impacts of the global financial crisis, we exclude the selection of multiple spells. In other words, the length of trade relationships is calculated until the first exit. See more multiple spells in Besedeš and Blyde (2010).

14. Wang, Powers, and Wei (2009) indicate that the United States increased its deeply integrated link of value chains in production networks via other Asian countries.

15. In addition, more than 50% of Taiwan’s machinery exports are destined for China (i.e. September 2009).

16. There are significant differences in total trade value of exports between these two industries reflected from Figures 2 and 3, particularly in parts and components. For these reasons, a negligible difference of survival rate would not affect overall results that this paper mentions.