Trade costs and borders in the world of global value chains

There is a growing body of statistical evidence of the importance of value chains for the global economy. The perception of longer value chains with more border crossings raised concerns about multiple trade barriers and associated costs. In the existing literature, however, the investigations of the accumulation of trade costs through the multi-stage production rarely extended beyond illustrative examples. The likely reasons are poor data and technical difficulties inherent in the newly developed accounting methods that focus on value added flows irrespective of border crossings. This paper proposes two new approaches to quantify the accumulation of trade costs along global value chains and a measure of the average number of border crossings in value chains. These approaches build on the inter-country input-output accounting frameworks that trace gross trade flows backward to their initial origin or forward to their ultimate destination. Data from the World Input-Output Database are supplemented with estimates derived from the UN Comtrade and UN TRAINS, allowing for an experimental computation of the accumulated import tariffs faced by exporters in 2001, 2005 and 2010. At the aggregate country and sector levels, the accumulation of import tariffs is found to be pervasive but moderate. The average number of border crossings exhibits a slow upward trend, but the accumulated tariffs decline quickly. Trade liberalization therefore neutralizes the risk of higher cumulative protection associated with the international fragmentation of production. The findings suggest that the input-output accounting frameworks may significantly extend the frontier of trade policy analysis in the world of global value chains.