The Reorganization of Global Value Chains in East Asia before and after COVID-19

Abstract

This paper provides empirical evidence on the reorganization of GVCs in East Asia, highlighting that structural trends explain a decrease in the fragmentation of production after 2011 but that it is not the result of rising trade costs along the value chain Using harmonized inter-country input-output tables, the paper first analyzes the global import intensity of production to document changes in the structure of GVCs It then calculates theory-consistent bilateral trade costs for intermediate and final products using an approach derived from the gravity literature and introduces a new index of cumulative trade costs along the value chain These data are used to discuss whether the decrease in global imports is the consequence of shifts in demand, efficiency-enhancing strategies of firms or rising trade costs Between 2011 and 2016, cumulative trade costs have decreased in East Asian GVCs However, as COVID-19 is likely to intensify trade and investment uncertainties, trade costs could increase in the future Policies aimed at reducing uncertainties and preserving the gains from trade and investment liberalization will be key in this new environment