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Trade and Growth in the Age of Global Value Chains

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Abstract: We revisit the relationship between trade and growth taking into account the recent expansion of global value chains (GVCs). We develop a new instrument for trade based on gravity estimations. Our instrument exploits a recent transportation shock: the sharp increase in the maximum size of container ships, which has more than tripled between 1995 and 2007. This shock has an asymmetric impact on different bilateral trade flows, based on the ex-ante presence of deep-water ports across countries, since these are the only ports that can accommodate the new larger ships. Our empirical set-up allows us to obtain instrumental variables not only for gross trade flows, but also for the different value added components of exports, for which we run separate gravity estimations based on WIOD data. We find that trade has a positive effect on GDP per capita, both in levels and in growth terms. Evidence at the country and industry level suggests that the effect works through both productivity improvements and capital deepening. We show that the effect of exports on income is crucially moderated by differences in their value added composition. In particular, we find evidence of stronger export effects on growth for countries that upgrade their positioning or improve their participation to GVCs more than others over time.

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