Where is the Value Added? Trade Liberalization and Production Networks
62 Pages Posted: 26 Sep 2016
Date Written: August 2019
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
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