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Where is the Value Added? Trade Liberalization and Production Networks

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  • Rahel Aichele

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  • Inga Heiland

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 3-9 percent 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.

Suggested Citation

  • Rahel Aichele & Inga Heiland, 2016. "Where is the Value Added? Trade Liberalization and Production Networks," CESifo Working Paper Series 6026, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6026
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp6026.pdf
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    References listed on IDEAS

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    1. Zhi Wang & Shang-Jin Wei & Kunfu Zhu, 2013. "Quantifying International Production Sharing at the Bilateral and Sector Levels," NBER Working Papers 19677, National Bureau of Economic Research, Inc.
    2. Jonathan Eaton & Robert Dekle & Samuel Kortum, 2007. "Unbalanced Trade," American Economic Review, American Economic Association, vol. 97(2), pages 351-355, May.
    3. Ghosh, Madanmohan & Rao, Someshwar, 2010. "Chinese accession to the WTO: Economic implications for China, other Asian and North American economies," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 389-398, May.
    4. Yuqing Xing & Neal Detert, 2010. "How the iPhone Widens the United States Trade Deficit with the People’s Republic of China," Trade Working Papers 23280, East Asian Bureau of Economic Research.
    5. Agnès Bénassy-Quéré & Yvan Decreux & Lionel Fontagné & David Khoudour-Castéras, 2009. "Economic Crisis and Global Supply Chains," Working Papers 2009-15, CEPII research center.
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    Cited by:

    1. Gabriel Felbermayr & Jasmin Katrin Gröschl & Inga Heiland, 2018. "Undoing Europe in a New Quantitative Trade Model," ifo Working Paper Series 250, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Gabriel Felbermayr & Rahel Aichele & Inga Heiland, 2016. "Going Deep: The Trade and Welfare Effects of TTIP Revised," ifo Working Paper Series 219, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

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

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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