On the Geography of Global Value Chains

Abstract

This paper develops a multi‐stage general‐equilibrium model of global value chains (GVCs) and studies the specialization of countries within GVCs in a world with barriers to international trade. With costly trade, the optimal location of production of a given stage in a GVC 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. We show that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central locations. We also develop and estimate a tractable, quantifiable version of our model that illustrates how changes in trade costs affect the extent to which various countries participate in domestic, regional, or global value chains, and traces the real income consequences of these changes.

Trade Integration, Global Value Chains, and Capital Accumulation

“…Johnson and Noguera (2017) show that countries that expanded GVCs more were those with higher GDP growth in their sample of more than 40 countries over the period 1970-2007. In this paper, we build a dynamic two-country model featuring sequential, multi-stage production and capital accumulation to study the joint dynamics of investment, growth and GVC trade. Specifically, we introduce capital accumulation and growth into the GVC trade model of Antràs and de Gortari (2020). Consistent with the empirical findings, our model implies that declining trade costs expand GVC trade across countries, particularly in the faster growing economy.…”

“…This is because trade costs apply to the gross value, and the later stages compound trade costs from all previous stages; hence, trade in earlier stages effectively incurs lower costs. This pattern is also pointed out by Antràs and de Gortari (2020). Owing to the symmetry, the presence of endogenous capital accumulation does not affect the dynamics of GVC trade, but GVC trade does impact the dynamics of investment and capital accumulation quantitatively and qualitatively.…”

“…In general, fragmentation of stages across borders occurs more frequently in earlier stages of production. This pattern is also pointed out by Antràs and de Gortari (2020). This is because trade costs apply to the gross value, and the second stage compounds trade costs from every stage, so trade in earlier stages effectively incurs lower costs.…”

“…(a n l(n) (z)) −αnβn in Antràs and de Gortari (2020). Antràs and de Gortari (2020) show that the lead-firm approach is isomorphic to an alternative framework with stand-alone producers of different stages making cost-minimizing sourcing decisions for their input in a decentralized manner, with additional assumptions on information available to producers at each stage about the exact costs of producers at earlier stages. We describe our model using only the lead-firm approach.…”

Are African exports that weak? A trade in value added approach

“…Authors like Antràs and De Gortari (2017) have suggested that trade costs have a more detrimental effect on downstream than upstream production stages. As the alleged weakness of African exports is generally explained by the higher level of trade costs borne by these countries, it would not be surprising to find a lower penalty on their trade in intermediate goods than on their trade in final goods.…”