Trade Frictions and Global Value Chains

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

In recent decades, technological progress and falling trade barriers have allowed firms to slice up their value chains, retaining within their domestic economies only a subset of the stages in these value chains. The rise of global value chains (GVCs) has dramatically changed the landscape of the international organization of production, and has also led to a renewed interest in policies designed to affect the participation and position of countries in these GVCs. This project aims at studying the specialization of countries within GVCs in a world with barriers to international trade. This research will serve to elucidate the possible effects of further reductions in trade barriers on fragmentation of production across continents, likely leading to a more significant participation of Africa in GVCs. This research will also serve as a useful platform to launch a study of the role of trade policies in shaping the position of countries in value chains. This project will further provide answers to important policy questions such as whether countries should actively pursue policies that help them participate in GVCs, or whether governments should implement policies aimed at moving them up the value chain. The researcher will develop a general framework to analyze the optimal organization of a sequential production process consisting of N stages to be performed sequentially in any of J countries. A key aspect of the analysis is the presence of transportation costs across countries which, other things equal, create a force towards concentrating the various stages of a value chain within a single country. This project will explore two approaches to generating gains from slicing value chains across countries. The first one relies on the presence of agglomeration economies, while the second one invokes Ricardian differences in productivity across production stages and countries. Countries also differ in their size and in their geography, as captured by a J×J matrix of iceberg trade coefficients. Characterizing the set of Pareto optimal allocations of production across stages and countries is not straightforward because the optimal location of production of a given stage is not only a function of the marginal cost at which that stage can be produced in a given country, but is also shaped by the proximity of that location to the precedent and the subsequent desired locations of production. Because the structure of the problem is similar to that of the minimal distance Hamiltonian path problem in graph theory, or the associated travelling salesman problem (TSP) in combinatorial optimization, the investigator will examine the problem by building on computational methods for TSP. In addition, this project will empirically study the optimal specialization within value chains in eleven countries in Asia.