DP11044 Global Supply Chains and Trade Policy
How do global value chain linkages modify countries' incentives to impose import protection? Are these linkages empirically important determinants of trade policy in practice? To address these questions, we develop a new value-added approach to modelling tariff setting with GVCs, in which optimal policy depends on the nationality of value-added content embedded in home and foreign final goods. Theory predicts that discretionary tariffs will be decreasing in the domestic content of foreign-produced final goods and (provided foreign political interests are not too strong) the foreign content of domestically-produced final goods. Using theory as a guide, we estimate the influence of GVC linkages on trade policy with newly assembled data on bilateral applied tariffs, temporary trade barriers, and value-added contents for 14 major economies over the 1995-2009 period. Our empirical findings indicate that GVCs already play an important role in shaping trade policy. Governments set lower tariffs and curb their use of temporary trade protection (particularly against China) where GVC linkages are strongest.
