How Does Economic Policy Uncertainty Impact a Country's Position in Global Value Chains?

Jiaxuan Zhang, Hongsheng Zhang, Xuhang Shen and Bo Meng

China & World Economy, 2024, vol. 32, issue 5, 28-52

Abstract: Economic globalization in the 21st century has been characterized by the rise and spread of global value chains (GVCs). It faces significant challenges due to increasing domestic and international policy uncertainty in the context of emerging mega risks like geopolitical tensions and climate change. This paper begins by constructing a theoretical model for an open economy to study how risk‐averse firms make decisions regarding the sourcing of intermediate inputs in an uncertain environment. Our model solution proposes that firms will source fewer intermediate inputs from countries with more economic uncertainty. An increase in domestic and foreign uncertainty will have opposite impacts on a country's position in GVCs. In this sense, we argue that a country tends to move downstream along GVCs if its own economic policies become more uncertain, and it tends to move upstream with an increase in the uncertainty of its trading partner countries. Our regression analyses, based on data including the World Input–Output Database, World Development Indicators, the UN Comtrade database, and the Economic Policy Uncertainty Index, provide empirical support for this model‐based conclusion. Our findings highlight that a nation must consider foreign economic policy uncertainty and maintain domestic policy stability to participate in GVCs.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/cwe.12547

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:chinae:v:32:y:2024:i:5:p:28-52

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1671-2234

Access Statistics for this article

China & World Economy is currently edited by Yongding Yu

More articles in China & World Economy from Institute of World Economics and Politics, Chinese Academy of Social Sciences Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().