Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Where is the Value Added? Trade Liberalization and Production Networks Abstract Fragmentation of the global value chain makes it difficult to assess the effects of trade liberalization on the global pattern of production. Gross bilateral trade ows no longer reveal a country's or a sector's value added contribution. Yet, it is value added that matters for employment and welfare. We derive a structural equation for value added trade ows and theorybased measures for production networks from a multi-sector gravity model with inter-sectoral linkages to analyze the effects of trade liberalization in the presence of globally fragmented value chains. We estimate the model's key parameters, calibrate it to the year 2000 using the World Input-Output Database, and perform a counterfactual analysis of China's WTO accession. We find that China's WTO entry accounts for about 45% of the decrease in China's value added exports to exports ratio and for about 7% of the decline in this figure on the world level as observed between 2000 and 2007. Furthermore, our results imply that China's WTO accession was the driving force behind the strengthening of production networks with its neighbors and led to significant welfare gains for China, Australia, and the proximate Asian economies. Terms of use: Documents inJEL-Codes: F130, F140, F170.

To what extent has trade liberalization contributed to global production fragmentation and the formation of production networks? We derive structural equations for value added trade flows, the domestic value added content of exports (DVA) and the value added to exports (VAX) ratio, as well as modelbased measures for production networks from a multi-sector gravity model with inter-sectoral linkages. We calibrate the model and perform a counterfactual analysis of China's WTO accession in 2001. We find that the associated trade cost changes spurred global production fragmentation, explaining about 6-12% of the decrease in the world DVA ratio as observed between 2000 and 2007. For China, the counterfactual experiment robustly replicates the increase in its DVA ratio, driven by the export-processing zones. Furthermore, our results imply that China's WTO accession was a driving force behind the strengthening of production networks with its neighbors. $ We thank Lorenzo Caliendo for valueable comments and for providing us with his program code. We also thank Wolfgang Keller, as well as seminar participants at Stanford University, UC Irvine, University of Munich, the GEP China/ifo/CEPII conference and the Annual meeting of the ETSG 2013, CEA 2015 and CIE 2015 for valuable comments and suggestions. Funding: This work was supported by the Deutsche Forschungsgemeinschaft (DFG) [grant number KO 1393/2-1 | YA 329/1-1/ AOBJ: 599001]; and the Leibniz Association [grant number SAW-2016-ifo-4].

Abstract:The European Union is the world's deepest free trade zone. Amongst its members, it has abolished tariffs and lowered non-tariff barriers. This has led to trade creation within Europe and to trade diversion between EU countries and outsiders. Deep trade integration and the resulting mutual dependence has, in the eyes of many, facilitated political integration. The Transatlantic Trade and Investment Partnership (TTIP) will undo some of these effects by means of preference erosion, so that cross-country trade links within Europe may lose relative prominence. However, the presence of a rich fabric of regional value chains in Europe and substantial income effects could counter this development. We provide insights on the empirical importance of these effects based on a New Quantitative Trade Model. We show that TTIP could indeed lower trade integration in Europe since predicted income effects turn out not to be large enough to overcome the effects of preference erosion. However, there is substantial heterogeneity across sectors and countries. One way to minimize preference erosion would be to promote projects and programs to further deepen the EU's single market.

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