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Where is the value added? Trade liberalization and production networks

Rahel Aichele and Inga Heiland

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: To what extent has trade liberalization contributed to global and regional 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 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 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.

Date: 2018
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Citations: View citations in EconPapers (62)

Published in Journal of International Economics 115(2018): pp. 130-144

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Journal Article: Where is the value added? Trade liberalization and production networks (2018) Downloads
Working Paper: Where is the Value Added? Trade Liberalization and Production Networks (2016) Downloads
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