Abstract
This study investigates the role of value-added bilateral trade focused on global value chains to achieve sustainable economic development. Our findings address trade policy implications that help to mitigate the global imbalances and exchange rate conflicts. These policies are expected to provide a competitive advantage that can be crucial to the sustainability of free trade. We apply traditional trade models to the value-added framework to examine the effects on value-added trade. Empirically, we investigate the bilateral value-added trade for recent years. Our major findings are that currency devaluation has a positive effect on value-added exports but has a negative effect on gross exports because of the effect on intermediate goods trading dominating the effect on international trade, i.e., the effect on foreign content of intermediate imports dominating the effect on the domestic content of exports. The same effect applies to imports. Also, we confirm that foreign income has a positive effect on exports and value-added exports, and domestic income has a positive effect on imports and value-added imports. However, their effects on trade balance are not consistent. Our major findings imply that the analysis of value-added trade can best contribute to the sustainability of global free trade by considering trade policies as a result of reflecting the easing of the global imbalance and the exchange rate war.
Highlights
International trade has greatly increased with more participation in global production and trade by vertical specialization in tasks
This study on the role of value-added exports within a bilateral trading partner aims to improve our understanding of the sustainable linkage between global value chains (GVCs), international trade, and free trade policies
This study aims to help forecast the exact trade deficits and prevent global imbalance, which is necessary to enhance the sustainability of free trade as GVCs expand
Summary
International trade has greatly increased with more participation in global production and trade by vertical specialization in tasks. The role of global value chains (GVCs) in shaping international trade has important implications for economic growth and sustainable development according to Fessehaie and Morris [1]. This study on the role of value-added exports within a bilateral trading partner aims to improve our understanding of the sustainable linkage between GVCs, international trade, and free trade policies. Our findings on the influential role of intermediate trade will contribute to improving international trade policies for GVCs, which could be critical to reach economic growth and sustainable development objectives. The foreign content of exports has increased, and value-added trade is more considered because gross trade statistics overestimate exports and imports. The trend of the value-added bilateral trade balance of Korea and the US after 2010 explains the dramatic increase in the value-added trade imbalance between the US and China. As Korea has a larger share of domestic value-added to meet foreign final demand
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