Trade in value-added and the welfare gains of global value

In the current era of global value chains, the manufactured goods exported by a given country embed the value-added of many different other  countries that intervened at specific stages of the production process. Unlike what is suggested by traditional trade statistics, the trade relationship between two countries is thus more multilateral than bilateral. Classical theoretical models that explain international trade, most often based upon the aforementioned trade statistics, do not explicitly take into account the complexity of the international production process. We propose a model that reflects more the functioning of international trade today by relying upon value-added exports, a data that reports the value-added of a given country in the goods consumed by its trading partners. Our model allows us to calculate the net share of international fragmentation in the welfare gains of trade and show that it is not that high, at least compared to the gross share. We also show that the total welfare gains of trade are different than what could predict a classical trade model, especially for upstream countries which would lose less real wage from a move to autarky and for downstream countries which would lose more.

Author: Arnold, Njike
Volume: 2019.06
Publisher: INFER
Year: 2019
No. of pages: 40
Working papers