Where is the Value Added? Trade Liberalization and Production Networks

62 Pages Posted: 26 Sep 2016

See all articles by Rahel Aichele

Rahel Aichele

CESifo (Center for Economic Studies and Ifo Institute)

Inga Heiland

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: August 2019

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 exports to exports (VAX) ratio, as well as model-based 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 2000-2007. For China, the counterfactual experiment robustly replicates the increase in the 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.

Keywords: production fragmentation, global value chains, production networks, trade in value added, tariff liberalization, China’s WTO accession

JEL Classification: F130, F140, F170

Suggested Citation

Aichele, Rahel and Heiland, Inga, Where is the Value Added? Trade Liberalization and Production Networks (August 2019). Available at SSRN: https://ssrn.com/abstract=2843440 or http://dx.doi.org/10.2139/ssrn.2843440

Rahel Aichele (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Inga Heiland

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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