Infrastructure and global value chain position: Evidence from China

This paper studies the impact of transportation costs on a country’s participation in Global Value Chains (GVCs) and the consequential role of the processing producers. In doing so, I incorporate the processing production into a sequential production model à la Antrás and de Gortari (2020) with a multivariate Frechet distribution. My model predicts that a reduction in foreign trade costs increases the specialization of a region in exporting downstream products, and processing exports are more responsive to foreign trade costs than ordinary exports. These two predictions are consistent with the empirical facts documented by the development of the Chinese Expressway between 2000 and 2010, which serves as a natural experiment. In my welfare analysis, my model shows that a reduction in foreign transportation costs leads to a 0.4% of aggregate welfare gain, and processing exporters can explain up to 80% of this welfare gain. However, removing expressways and processing policies together results in a welfare loss of 4.82%, lower than the loss of removing expressways alone, which is 17.3%. This suggests that the implementation of the processing trade policy is not always beneficial when considering the placement of transportation infrastructure. This is because transportation infrastructure changes the relative importance of domestic and foreign markets.