Footloose Global Value Chains: How Trade Costs Make a Difference

Abstract

The geography of global value chains (GVCs) depends crucially on trade costs between countries that host the various stages of production, and some stages might be more sensitive to trade costs than are other stages. In this paper, we exploit a value-added decomposition of bilateral trade flows to distinguish the low value-added GVC trade that is typically associated with production stages such as assembly, from the high value-added GVC trade that is associated with stages such as R&D and design. We test the hypothesis that low value-added stages are more easily rerouted—given changes in trade costs between importing and exporting countries—than are high value-added stages. The intuition for this hypothesis is that trade costs accumulate with multiple border crossings and are larger relative to the profit margins in low value-added stages. Furthermore, high value-added stages often require larger fixed cost investments that are often highly relationship-specific and knowledge-intensive, making them harder to relocate. We find strong empirical support for this hypothesis. This observation has important implications for development policies and bilateral trade policies that are aimed at reducing imbalances by repatriating offshored production stages.