The impact of industrial policy on China’s economic growth has been difficult to assess, in part due to the lack of direct evidence on government support measures, which remain secret. This research uncovers hidden subsidies provided to the Chinese shipbuilding industry, which has more than doubled its global market share in recent years. The subsidies decreased shipyard costs in China by 13-20% between 2006 and 2012, policy interventions that have led to substantial misallocation of global production with no significant gains for consumers. Japan, in particular, has lost market share.
Global sourcing is on the rise. Recent estimates suggest that intermediate input flows account for about two-thirds of the volume of world trade (Johnson and Noguera, 2012). Boeing’s production of the 787 Dreamliner exemplifies the growing involvement of foreign suppliers in U.S. manufacturing: 70 percent of the Dreamliner’s parts are sourced from 50 suppliers located in 9 countries. Meanwhile, during the last U.S. presidential election, we saw a backlash against international trade. Research, too, documents negative effects of increased trade integration. However, most of this evidence comes from trade in final goods. This paper examines the question: how do we analyze the phenomenon of firms increasingly sourcing intermediate inputs?
Japan’s nineteenth century opening to world commerce after a long period of economic self-sufficiency provides a natural experiment to test the theory of comparative advantage and the gains from trade that it predicts. Drawing on a wide range of historical sources for data on prices, output and trade flows, this research finds that the country benefited from a significant boost to GDP in the years following its forced reintegration with the global economy. The evidence constitutes a strong indication of the potential costs of rejection of today’s open system of world trade.