In recent decades, growth of world trade has been driven largely by rapid growth of trade in intermediate inputs. Much of input trade involves multinational firms locating input processing in their foreign affiliates, thereby creating global vertical production networks. We use firm-level data on U.S. multinationals to examine trade in intermediate inputs for further processing between parent firms and their foreign affiliates. Among our main findings are that demand for imported inputs is higher when affiliates face lower trade costs, lower wages for less-skilled labor, and lower corporate income tax rates.

We show how offshore profit shifting by US multinational enterprises affects several key measures of the US economy. Profits shifted out of the United States grew rapidly from the mid-1990s to 2010 and have since waned. From 1982–2016, on average, 38 percent of income attributed to US direct investment abroad is reattributable to the United States. We find that adjusting for profit shifting shrinks the trade deficit, decreases the return on US foreign direct investment abroad, boosts productivity growth rates in the late 1990s and early 2000s, and lowers labor’s share of income. (JEL E23, E25, F14, F23, H25, H87, L25)