The Value Added Structure of Trade Flows: Implications for Trade Policy Analysis

• Agricultural Economics Workshop

Date and Location

Thursday, October 12, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

Global Value Chains have become a key future of today's global economy and are the heart of international trade and investment policy. As over 50% of trade in goods takes place in intermediaries, planning a trade policy couldn't rely upon gross trade statistics. New trade figures are required in order perform a more accurate analysis of trade via the deconstruction of traded products in terms of value-added content, distinguished by sector/region of origin/destination. Our approach builds on the inter-country input-output accounting frameworks that trace gross trades backward to their initial origin or forward to their destination. Data from the Global Trade Analysis Project database are used within the CGE model, allowing for counterfactual computation of the trade in value added decomposition. The findings of an experiment simulating a Free Trade Area between European Union and Japan suggests that the new version of the model may significantly extend the frontier of trade policy analysis in the world of global value chains. Moreover, a new instrument for trade policy analysis in a context of international fragmentation of productive processes is proposed. The "value added trade restrictiveness index" (VATRI) is theoretically grounded, thus solving the main problem of aggregation in the measurement of protection. In a general equilibrium framework, and using the decomposition methods proposed in macro approaches by recent value added in trade literature, the index gives summary statistics for both direct and indirect effects of protectionism. The VATRI allows to measure the overall protectionist stance in terms of value added, rather than with reference to the more traditional metrics, such as gross trade. The index is constructed in such a way as to distinguish, at the bilateral level, the domestic and the foreign (bilateral or indirect) value added content of imports. We bilaterally compute the VA-TRI for three of the major economies, European Union, United States and China.