Global Value Chains and Product Differentiation: Changing the Politics of Trade

Abstract

Both global value chains and trade in differentiated goods have become increasingly important in the international economy. We argue that these two developments interact in changing the political economy of trade. For finished goods, product differentiation facilitates trade liberalization because the adjustment costs of liberalization are lower when countries trade varieties of the same good. By contrast, for goods that are used as inputs in the production process, product differentiation makes trade liberalization more difficult. We find support for this argument in two tests. On the one hand, we look at patterns of lobbying on US preferential trade agreements (PTAs). On the other hand, we use a data set with highly disaggregated tariff data from 61 PTAs signed between 1995 and 2013. The paper contributes to the long‐standing debates on endogenous tariff formation and the consequences of intra‐industry trade, and a nascent literature on the relationship between global value chains and trade policy.

Introduction: Bringing Institutions Back in the Study of Global Value Chains

“…More specifically, contrary to the shared view that GVCs should always make trade liberalization easier, this contribution demonstrates that GVCs, namely, trade in intermediate goods, in the presence of IIT, that is, trade in differentiated products make trade liberalization less appealing and, therefore less likely. Baccini and Dür () empirically corroborate this argument by showing that the combination of GVCs and IIT incentivizes firms to lobby alone rather than via encompassing trade organizations, and leads to lower tariff cuts in PTAs. This finding has important implications because it casts doubts on the widely held view that GVCs should always give rise to deep and ambitious trade agreements.…”

“…In addition, GVCs create incentives for greater regulatory harmonization, generating a demand for PTAs that are broader in scope (Baldwin, 2011). Baccini and D€ ur (2018) contribute to this debate by showing for the first time how GVCs interact with intra-industry trade (IIT) to produce particular preferences and outcomes with regards to PTAs. More specifically, contrary to the shared view that GVCs should always make trade liberalization easier, this contribution demonstrates that GVCs, namely, trade in intermediate goods, in the presence of IIT, that is, trade in differentiated products make trade liberalization less appealing and, therefore less likely.…”

Trade policy in a “GVC World”: Multinational corporations and trade liberalization

“…Hence, following Baccini and Dür (2018), we chose the first-year tariff cut as our measure of the ambition of tariff cuts in PTAs. The variable Tariff Cut , which is calculated as the difference between the tariff rate at time t 0 and the tariff rate at time t 1, divided by the tariff rate at time t 0, can take on values between zero (no tariff cut in the first year) and one (tariffs are cut completely in the first year).…”

“…4E.g., Baccini and Dür (2018); Baccini et al (2018); Eckhardt and Poletti (2016); Kim (2017); Kim and Osgood (2019); National Board of Trade (2015); Osgood et al (2017); Yildirim et al (2018). …”

Cherry picking in the design of trade policy: why regional organizations shift between inter-regional and bilateral negotiations

“…Trade in the twenty-first century shifted by and large from export and import of finished goods to trade in intermediate goods (Baldwin, 2010). Such global supply or value chains sparked an intensive debate on their consequences for the politics of trade (Baccini & D€ ur, 2018). One implication is that trade agreements, nowadays, have a comprehensive scope: they cover more issues than trade in goods and agriculture, namely also investments, services as well as regulatory standards next to political issues (D€ ur et al, 2014).…”