Trade costs, global value chains and economic development
Journal of Economic Geography, 2018.
This paper develops a model to study the impact of trade costs on developing countries’ industrialization when sequential production is networked in global value chains (GVCs). In a two-country setting, a decrease in trade costs of intermediate goods is associated with South joining and moving up the value chain and both North and South experiencing welfare improvement. As trade costs further decrease, the wage gap between North and South first increases and then decreases. Extending the model to a multi-country setting, I show that reduced trade frictions lead South countries to join GVCs due to wage differentials and low trade costs. This increases North wage but may decrease the wages of South nations that are already part of the network. Moreover, South nations that join tend to be regionally clustered. The model provides a first look at GVCs from the development angle, and raises policy questions regarding the governance of GVCs.