Where is the Value Added? Trade Liberalization and Production Networks

Abstract

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].

Trade agreements and participation in global value chains: Empirical evidence from Latin America

“…The estimations suggest that trade policy within the region can encourage intraregional TiVA to a considerable extent, regardless of the role played in GVCs, whether buying or selling position in production networks. Conversely, we notice that these policy‐based results have been suggested by empirical evidence applied to both final goods (Guilhoto et al, 2015; Rubínová, 2017; Yotov et al, 2016) and intermediate goods (Aichele & Heiland, 2018; Egger et al, 2017; Guilhoto et al, 2015; Laget et al, 2018).…”

“…Motivated by these concerns, this study focuses on identifying the relationships between the trade policy based on RTAs and the value‐added content of bilateral world trade. Estimating the model with trade in value‐added (TiVA) measures makes it possible to assess the impact of trading costs, as pointed out by (Aichele & Heiland, 2018; Johnson & Noguera, 2017; Njike, 2021). Although recent evidence has incorporated value‐added exports into the classic gravity models as a dependent variable, many do not consider heteroscedasticity in log‐linear models, further comprising the potential bias in the estimated parameters (Amendolagine et al, 2019; Boffa et al, 2019; Johnson & Noguera, 2017).…”

Cutting Through the Value Chain: The Long-Run Effects of Decoupling the East from the West

“…lar its neighbours (Aichele and Heiland, 2018). Global supply chains are characterised by multiple border crossings (Johnson and Noguera, 2017).…”

Modelling global value chains: From trade costs to policy impacts

“…On each route, including domestically, shipments are subject to iceberg trade costs, composed of tariff and non‐tariff components. Following Aichele and Heiland (2018), trade costs vary by end use, so intermediate shipments can be subject to different trade costs from final goods shipments.…”

“…A more recent literature has extended the structural gravity framework to incorporate multiple sectors, in addition to multiple countries, with input-output relationships among them. A key contribution is Aichele and Heiland (2018), who extend the multi-sector Ricardian model of Caliendo and Parro (2015) to consider trade in value added in the sense of Koopman et al (2014). As such, their model makes it possible to examine the consequences of a change in trade policy, captured through a change in iceberg trade costs, on production sharing across sectors and countries.…”