International competitiveness in a vertically fragmented production structure: empirical challenges and evidence

We explore value-added trade measures to illustrate countries specialization patterns in vertically integrated production networks.We argue that trade analyses grounded on statistics based on gross export flows are becoming less and less appropriate to support political discussions. With this in mind, we calculate bilateral trade balances and the revealed comparative advantage (RCA) in gross and value-added terms as proposed by Koopman et al. (2014). Our findings indicate that bilateral trade deficits or surpluses are not what used to appear prior to the emergence of global value chains (GVCs), as well as a country´s specialization pattern and its export performance. Our findings highlight a positive linear association between higher levels of domestic value-added (DVA) and higher levels of RCA, though restricted to a limited group of countries. The findings show that most countries that have remained internationally competitive in manufacturing sectors over time have also experienced the largest increases in DVA shares of their sector´s gross exports. China is the most relevant exception, since the country has risen its international competitiveness and is prominent in adding domestic value to its gross exports. The implications of our findings go beyond the case of China. They indicate that researchers must be cautious about drawing policy conclusions when there are signs that productive capabilities play an important role in countries integration in GVCs and its outcomes.