“Global Sourcing and Domestic Value-added in Exports” by Edwin Lai
Hong Kong University of Science and Technology
Production has been more globalized and fragmented. About 2/3 of global trade is intermediate input trade. Domestic content in exports has been declining in most countries. Quantifying the main drivers of changes in domestic content in the exports of countries around the world can help us to predict the future of global production fragmentation.
Towards this end, we build a quantifiable Ricardian model of trade (a la Eaton-Kortum) with domestic and global input-output linkages. We then conduct an accounting exercise to quantify the contribution of each determinant of the domestic value-added ratio (DVAR) in the exports of each individual country as well as DVAR of world trade, focusing on changes in technology, trade costs and primary factor costs.
We find that lower trade frictions around the world have contributed significantly to the decline in the global DVAR. But changes in technology also have significant effects on the global DVAR, with more significant effect on certain countries (e.g., China). Globally declining trade frictions had a larger negative effect on the DVAR of developed countries than that of less developed countries. Fast-growing countries, like China and India, which experienced substantial improvement in technology, despite falling trade frictions, could have DVAR increasing over time.