Where is the value added? China's WTO entry, trade and value chains

In the 2000s, China's WTO entry constituted a major trade shock. In this paper, we analyze its eff ects on trade and value chains. The fragmentation of the global value chain makes it hard to disentangle who produces for whom. Value added trade contains this information. We build a multi-sector gravity model of the Eaton and Kortum (2002) type with inter-sectoral linkages that gives rise to a gravity equation for value added trade flows. As in Koopman et al. (forthcoming), exports can be decomposed into value added exports, exports of foreign value added and double counting. We construct a panel database of value added trade for 40 countries and the years 1995-2009 from the World Input-Output database. With WIOD and tariff data, we estimate the gravity model's key parameters. The simulation then hypothetically sets tari s w.r.t. China back to their pre-accession levels. We find that China's WTO entry strengthend the Asian production network. Chinese value added in exports reduced and increasingly foreign value added - most prominently from Japan and Korea - is assembled and exported.