Global value chains and its policy implications

Interim Report

Edited by ITO Tadashi
Published in March 2016

Heckscher-Ohlin:Evidence from virtual trade in value added (377KB) / Tadashi Ito, Lorenzo Rotunno, Pierre-Louis Vézina

The fragmentation of production chains across borders is one of the most distinctive feature of the last 30 years of globalization. Nonetheless, our understanding of its implications for trade theory and policy is only in its infancy. We suggest that trade in value added should follow theories of comparative advantage more closely than gross trade, as value-added flows capture where factors of production, e.g. skilled and unskilled labor, are used along the global value chain. We find empirical evidence that Heckscher-Ohlin theory does predict manufacturing trade in value-added, and it does so better than for gross shipment flows. While countries exports across a broad range of sectors, they contribute more value-added in techniques using their abundant factor intensively.
Governments in developing countries have substantially reduced import tariffs during the last three decades. At the same time, some of these countries have gained a major role within global supply chains. In this paper, I examine how the rise of production sharing across countries shapes incentives to use protectionist trade policy. As sectors integrate into domestic and international supply chains, they benefit from access to cheaper inputs and thus lobby for lower tariffs on these products. I find empirical evidence corroborating this idea in seven Asian countries at the forefront of the so-called 'Factory Asia' supply chain. Tariff cuts are indeed significantly larger as imports embed a larger share of re-imported value added that goes back home through the supply chain. Tariffs decrease also with the importance of 'back-and-forth' trade in intermediates, a salient feature of global supply chains. Results support the view of governments acting to maximise local value added within the supply chain. Greater offshoring can tilt trade preferences of domestic producers away from protectionist stances.