The Role of Trade Costs in Global Production Networks : Evidence from China’s Processing Trade Regime

The Role of Trade Costs in Global Production Networks : Evidence from China’s Processing Trade Regime

In a seminal contribution, Yi (2003) has shown that vertically specialized trade should be more sensitive to changes in trade costs than regular trade. Yet empirical evidence of this remains remarkably scant. This paper uses data from China's...

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Bibliographic Details
Main Authors:	Ma, Alyson C., Van Assche, Ari
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ADVANCED COUNTRIES ADVANCED COUNTRY ADVANCED ECONOMIES APPAREL ASSETS BARRIER BENCHMARK BENCHMARK SPECIFICATION BILATERAL FLOWS BILATERAL TRADE BILATERAL TRADE BARRIERS BUDGET CONSTRAINTS BUSINESS CYCLE BUSINESS CYCLE FLUCTUATIONS BUSINESS CYCLES CHANGES IN TRADE COMMODITY COMPETITIVE CONDITIONS COMPETITIVENESS CONSUMERS CONTROL VARIABLES COST STRUCTURE COUNTRY OF ORIGIN CURRENCY CURRENCY UNION CURRENT ACCOUNT CURRENT ACCOUNT DEFICITS CURRENT ACCOUNT SURPLUSES CUSTOMS CUSTOMS REGIME DEPENDENT VARIABLE DEVELOPING COUNTRIES DISTORTION DOMESTIC CONSUMPTION DOMESTIC INPUTS DOMESTIC MARKET DUMMY VARIABLE DURABLE GOODS ECONOMIC COOPERATION ECONOMIC CRISIS ECONOMIC GEOGRAPHY ECONOMIC GROWTH ECONOMIC OUTLOOK ECONOMIC POLICY ECONOMIC RESEARCH ECONOMIC SHOCKS ELASTICITY ELASTICITY OF SUBSTITUTION ELECTRONICS INDUSTRY ENDOGENOUS VARIABLES EQUATIONS EQUILIBRIUM ERROR TERM EXPORT DEMAND EXPORT GOOD EXPORT PROCESSING EXPORT PROCESSING ZONES EXPORT PROMOTION EXPORT PROMOTION POLICIES EXPORT VALUE EXPORTER EXPORTS EXTERNAL DEMAND FINAL GOODS FIXED COSTS FIXED EFFECTS FOREIGN DIRECT INVESTMENT FOREIGN FIRM FOREIGN FIRMS FOREIGN MARKET FREE ENTRY GDP GDP PER CAPITA GENERAL EQUILIBRIUM GEOGRAPHIC DISTRIBUTION GLOBAL ECONOMY GLOBAL IMBALANCES GLOBAL TRADE GLOBALIZATION GRAVITY MODEL GRAVITY MODELS GRAVITY VARIABLES HOME COUNTRY IMBALANCE IMPACT OF TRADE IMPORT IMPORT CONTENT IMPORT GROWTH IMPORTS INCOME INCOME ELASTICITY INCOMPLETE CONTRACTS INDIVIDUAL FIRM INEQUALITY INFORMATION TECHNOLOGY INPUT-OUTPUT TABLES INSTRUMENTAL VARIABLES INTERMEDIATE GOODS INTERMEDIATE INPUTS INTERNATIONAL BUSINESS INTERNATIONAL COMPETITIVENESS INTERNATIONAL ECONOMICS INTERNATIONAL ECONOMY INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL TRADE INTERNATIONAL TRADE STATISTICS INTERNATIONAL TRANSPORTATION INVENTORIES MARGINAL COST MARKET ACCESS MARKET SHARE MARKET SIZE MEASURE OF TRADE MULTINATIONAL BUSINESS MULTINATIONAL FIRMS NET EXPORTS NON-TARIFF BARRIERS OIL PRICE OIL PRICES OIL-EXPORTING COUNTRIES ORGANIZATIONAL FORM OUTPUT OUTSOURCING POLITICAL ECONOMY POVERTY REDUCTION PRICE HIKES PRICE MOVEMENTS PRICE OF OIL PRODUCTION COSTS PRODUCTIVITY PROFIT FUNCTIONS PROTECTIONISM PROTECTIONIST RAPID GROWTH RE-EXPORTS RECESSION REDUCTION IN TARIFFS REGIONAL TRADE REGIONALISM ROBUSTNESS CHECK SLOWDOWN SOURCING TARIFF BARRIERS TECHNOLOGY TRANSFER TOTAL EXPORTS TOTAL IMPORTS TRADE BARRIERS TRADE COSTS TRADE DATA TRADE FLOWS TRADE INTEGRATION TRADE INTENSITY TRADE MODEL TRADE MORE TRADE PATTERN TRADE PATTERNS TRADE PERFORMANCE TRADE REGIME TRADE STRUCTURE TRADE SURPLUS TRADING PARTNER TRADING PARTNERS TRANSPORT COSTS TRANSPORTATION COSTS UNCERTAINTY UNIT OF LABOR UTILITY FUNCTION VALUE ADDED VERTICAL SPECIALIZATION VOLATILITY WAGES WORLD ECONOMY WORLD MARKETS WORLD TRADE WORLD TRADE ORGANIZATION
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20101201135542 http://hdl.handle.net/10986/3973

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Summary:	In a seminal contribution, Yi (2003) has shown that vertically specialized trade should be more sensitive to changes in trade costs than regular trade. Yet empirical evidence of this remains remarkably scant. This paper uses data from China's processing trade regime to analyze the role of trade costs on trade within global production networks (GPNs). Under this regime, firms are granted duty exemptions on imported inputs as long as they are used solely for export purposes. As a result, the data provide information on trade between three sequential nodes of a global supply chain: the location of input production, the location of processing (in China) and the location of further consumption. This makes it possible to examine the role of both trade costs related to the import of inputs (upstream trade costs) and trade costs related to the export of final goods (downstream trade costs) on intra-GPN trade. The authors show that intra-GPN trade differs from regular trade in that it not only depends on downstream trade costs, but also on upstream trade costs and the interaction of both. Moreover, intra-GPN trade is more sensitive to oil price movements and business cycle movements than regular trade. Finally, the paper analyzes three channels through which intra-GPN trade have amplified the trade collapse during the recent Global Recession.