GVCs and trade elasticities with multistage production

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.