WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Julia Wörz

We assess the impact of global value chains (GVCs) on global import demand and hence trade dynamics.  Unexpectedly  weak  dynamics  in global  trade flows  in  2012  and  2013 caused  a renewed discussion of a potential structural change in global trade drivers which has become visible  since  the  Great  Recession  in  2009  in  addition  to  the  cyclical  weakness  caused  by subdued investment. Using an econometric model for import demand we analyse the role of international fragmentation of production in the trade-to-income relationship. Our measure of GVC participation is based on the decomposition of trade flows proposed in Koopman et al. (2014). We combine trade data from UN Comtrade and national accounts data from the IMF’s World Economic Outlook with information on global linkages from WIOD for a sample emerging and advanced economies over the period from 1996-2011. We find a higher demand elasticity for emerging economies and a reinforcing effect of GVC participation, both in advanced and emerging economies. Recursive estimates suggest a decline in the demand elasticity already before the Global Crisis, suggesting that the process of GVC integration may have reached its peak. Such non-linearities have to be taken into account when designing export strategies and in particular export-oriented growth policies. Our result is further important for re-designing existing forecasting models of trade and GDP growth.