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Accumulating trade costs and competitiveness in global value chains

Author

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  • Diakantoni, Antonia
  • Escaith, Hubert
  • Roberts, Michael
  • Verbeet, Thomas

Abstract

Trade costs such as applied tariffs, transportation and insurance costs are amplified as they pass through the multiple production steps associated with modern supply chains. This so-called "cascade effect" arises since trade costs accumulate as intermediate goods are imported and then re-exported further downstream, going through different processing nodes before reaching the final consumer. Moreover, the financial impact of these trade costs is magnified in the "trade in tasks" rationale which governs global value chains (GVCs). Specialised processing firms need to recoup the associated trade cost applying to the full value of the good from the smaller fraction of value-added created at each consecutive productive stage. This large relative weight of transaction expenses on the profitability of individual business operations explains why trade along GVCs is particularly exposed to trade costs. The paper reviews the implications of trade costs on competitiveness at industry, national and global levels. The financial implications of trade costs at firm and sectoral level are based on trade in value-added data for 2011. The multilateral welfare effects of reducing discrete trade costs are identified using a network analysis approach, which goes beyond the traditional bilateral dimension of international trade and identifies where trade facilitation investment would have the highest social returns from a GVC perspective. The authors conclude that while the direct benefits of trade facilitation will be proportionally higher for those countries that are not well integrated into international trade because of their high trade costs, the global benefits of trade facilitation investments will also be high if they are undertaken by key traders that lie at the core of global value chains

Suggested Citation

  • Diakantoni, Antonia & Escaith, Hubert & Roberts, Michael & Verbeet, Thomas, 2017. "Accumulating trade costs and competitiveness in global value chains," WTO Staff Working Papers ERSD-2017-02, World Trade Organization (WTO), Economic Research and Statistics Division.
  • Handle: RePEc:zbw:wtowps:ersd201702
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    References listed on IDEAS

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    Cited by:

    1. Rekha Misra & Sonam Choudhry, 2020. "Trade War: Likely Impact on India," Foreign Trade Review, , vol. 55(1), pages 93-118, February.
    2. Robert C. Johnson, 2018. "Measuring Global Value Chains," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 207-236, August.
    3. Bacchetta, Marc & Bekkers, Eddy & Piermartini, Roberta & Rubinova, Stela & Stolzenburg, Victor & Xu, Ankai, 2021. "COVID-19 and global value chains: A discussion of arguments on value chain organization and the role of the WTO," WTO Staff Working Papers ERSD-2021-3, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Kirill Muradov, 2017. "Trade costs and borders in global value chains," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(3), pages 487-509, August.
    5. Daniel Chiquiar & Martin Tobal, 2019. "Global Value Chains in Mexico: A Historical Perspective," Working Papers 2019-06, Banco de México.
    6. Adam Jakubik & Victor Stolzenburg, 2020. "Footloose Global Value Chains: How Trade Costs Make a Difference," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(2), pages 245-261, September.

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    More about this item

    Keywords

    Global Value Chains; trade in value-added; international input-output analysis; trade costs; trade facilitation; competitiveness; effective rate of protection;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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