Global Value Chains and Protection

By Federico Mazzella ,
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A recent study carried out by the NBER discusses how greater integration into global value chains may become a strong incentive for reducing tariff protection.

An interesting paper by Emily J. Blanchard, Chad P. Bown and Robert C. Johnson, “Global Supply Chains and Trade Policy,” published by the National Bureau of Economic Research (NBER), examines the impact of countries’ integration into global value chains and the consequent reduction in tariff protectionism brought about by this integration.

The question that triggered this research was how global value chains (GVC) can modify the structure of import protection. The theory predicts that tariffs on final goods consumed in the domestic market will decrease as the domestic content of foreign-produced final goods increases. That is to say, as a country becomes more deeply integrated into a value chain in which it provides inputs for final goods consumed abroad, its own tariffs on the final goods it consumes will be lower.

As the study explains, it provides estimates based on “newly assembled data on bilateral applied tariffs, temporary trade barriers, and value-added contents for the 14 major economies over the 1995–2009 period.”

The authors found strong support for the empirical predictions of the model, which implies that global value chains are important determinants of trade policy, both in theory and in practice.

They conclude that GVCs “dissolve the link between the location in which final goods are produced and the nationality of the value-added content embodied in those goods.”

When the domestic content of foreign inputs is high, a country has an incentive to modify its tariff structure, which leads to a rise in imports. Integration into a GVC tends to lower optimal tariff rates. At the end of the day, optimal tariffs will depend on the domestic value added in GVCs. Therefore, any changes to the value added in GVCs should also have an impact on these tariffs.

The empirical results are confirmed both when countries apply protection through a bilateral tariff, as well as when they raise protection by adopting temporary trade barriers. The results prove the empirical relevance that the structure of GVCs has on governments’ trade policy decisions.

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