GVCs and Trade Elasticities with Multistage Production

Abstract

We build a quantitative model of trade with multistage manufacturing value chains, which features 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 elasticity of bilateral trade to trade costs increases, due to the endogenous reorganization of value chains (increased export platform production).Surprisingly, however, the elasticity of world trade to trade costs is not magnified by multistage production.

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