GVCs and Trade Elasticities with Multistage Production
Journal of International Economics, Volume 145, 103796, 2023.
with A. Moxnes
Abstract: We build a quantitative model of trade with multistage manufacturing value chains, which features many countries, iceberg trade costs, and technology differences across both goods and production stages. We estimate technology and trade costs via the simulated method of moments, matching bilateral shipments of final goods and inputs. Applying the model, we investigate how comparative advantage and trade costs shape the structure of global value chains and trade flows. As the level of trade costs falls, we show that the gravity elasticity of bilateral trade to trade costs increases, due to the endogenous reorganization of value chains and increased export platform production. Surprisingly, however, the resulting increase in world trade (as a share of GDP) is not magnified by multistage production, relative to a benchmark Ricardian model with roundabout production.
First Draft: November 2012. March 2013 version here. November 2016 version here. June 2019 version here. This paper previously circulated under the title: “Technology, Trade Costs, and the Pattern of Trade with Multistage Production.”