Global Production Networks with Global Uncertainty

Wenlan Luo is a Tenured Associate Professor at the School of Economics and Management, Tsinghua University, with research interests in Macroeconomics and International Economics. His current research focuses on the evolution of global trade, production, and financial structures amid macroeconomic uncertainty and geoeconomic conflicts, as well as the corresponding policy responses. His research has been published in prominent academic journals including AEJ, Macro, ReStat, EJ, and JIE. 

We investigate how global uncertainty affects sourcing decisions and aggregate trade. We develop a quantitative trade model with anticipatory sourcing building on the Eaton- Kortum/Caliendo-Parro framework. The model incorporates uncertainty in productivity and trade costs, enabling anticipatory effects and interactions between shocks. We show that bilateral sourcing is summarized by pairwise sufficient statistics capturing the influence of fundamental factors and global uncertainty. These sufficient statistics form a fixed point problem whose solution yields analytical sourcing expressions. We characterize the solution analytically and implement the model quantitatively. We find that the mere possibility of high future trade costs reduces trade through anticipatory sourcing shifts, and that these anticipatory shifts account for a sizable part of the welfare loss from an uncertain Trump trade war. Shocks from different sources interact: an uncertain Trump trade war amplifies losses from productivity uncertainty by hindering hedging through trade.