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Extraction-cum-substitution: A KISS approach to mapping the impacts of bilateral trade conflicts

Escaith, Hubert (2019): Extraction-cum-substitution: A KISS approach to mapping the impacts of bilateral trade conflicts.

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Abstract

This paper presents a simple yet powerful methodological tool for analysing the impact of a bilateral trade conflict on third countries when trade includes intermediate inputs. Mixing input-output modelling with recent development of trade in value-added analysis, the extraction-cum-substitution approach maps and measures the sectoral and global interactions in global value chains.It can also be used to generate “in silico” a large data set of numerical “observations” that can be further analysed using appropriate exploratory statistical techniques. The paper counts with three parts, besides introduction and conclusion. The first one is theoretical, starting with a formal model of inter-industry trade before describing the empirical application to input-output analysis. The second part is didactic, illustrating the method on a small six-countries/three-industries model.The third part applies the methodology to the bilateral trade conflict that arose between China and the USA in 2018. This section shows also how the method can also be used for generating analytical data and identify modes of insertion in the global economy. The program, written in open-source R language, is shown in annex.

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