Essays on the Value-added Trade, Wage Inequality and Servicifcation of Manufacturing in the Global Value Chains

The rise of global value chains (GVCs) has dramatically changed the world production patterns, in which countries specialize in specific stages of production and cooperate to produce the final goods. The international fragmentation of production gives rise to the fact that gross trade is increasingly unrepresentative to trade in value added, as intermediate cross borders many times in GVCs. The misleading perception of gross trade in GVCs has imposed new challenges for trade theories whose underlying basis is value-added terms. It also provide new insights into economic policies which were evaluated with gross trade data. In this thesis, we use the global input-output framework to improve the measure of global supply chain activities with value-added data. We will focus on three particular questions in GVCs: (a) the role of human capital in determining international fragmentation patterns and bilateral value-added trade across countries; (b) the impacts of GVC activities on the wage inequality of skills within firms; (c) the ever-strengthening intersectoral production linkages between manufacturing and services in GVCs (servicification of manufacturing). Chapter 1 introduces the background, research questions, and outline of this thesis. Chapter 2 reviews the literature regarding the measurement of GVCs, its labor market outcomes, and the servicification of manufacturing in GVCs. These studies give a full picture of GVC development and its impacts on labor market and services in recent decades. Chapter 3 provides an analytical framework of how different skills across borders determine the international fragmentation patterns and the bilateral value-added trade between the source and destination countries. By incorporating the global input-output framework into a standard gravity model, we propose a new mechanism that the bilateral value-added trade depends not only on the human capital of reciprocal countries, but also on that of the third countries which have indirect production linkages with the source or destination country in GVCs. This chapter further quantifies the direct and indirect effects of human capital on bilateral value-added trade and highlights the complementarities of skills across borders in GVCs. Chapter 4 studies how firms’ participation or upgrading in GVCs affects the wage inequality of skills within firms. In this chapter, we develop a trade model of heterogeneous firms with intermediate trade, various skill inputs, and fair wage hypothesis to examine firms’ wage premium changes via using imported intermediates for exports or moving up the GVCs. The model predicts that increasing firms’ participation in GVCs, as measured by the share of foreign value-added content in exports (FVAR), improves firms’ profits and thus amplifies the wage inequality between skilled and unskilled labor. Moreover, moving to upstream sectors in GVCs, as measured by the upstreamness of exporting varieties (or average distance from final use), raises firms’ wage premium by increasing the productivity of skilled workers. Using detail Chinese firm-level data between 2000 and 2006, we find robust empirical evidence that China’s FVAR is positively associated with skill wage premium within firms. We also observe that Chinese firms with higher upstreamness in GVCs tend to have larger wage inequality with more productive skilled workforces. Chapter 5 reveals an evident trend of servicification of manufacturing in GVCs in Asian countries, which were rarely studied in previous studies. We find the level of servicification in Asian countries is lower than that of OECD countries, but it contains more foreign service value-added content. We also identify five key factors in driving the trend of servicification. Countries with broader participation and lower positions in GVCs tend to have higher levels of foreign servicification in manufacturing. Improvement in information and communication technology (ICT) also raises the level of foreign servicification. However, countries with the larger supply of service workers, better regulation quality, and less government governance have a higher level of domestic servicification in manufacturing. Chapter 6 concludes and provides some policy implications. International cooperation on skill development is called for countries as various skills in different countries complement to each other to add value to the GVCs(Chapter 3). Firms’ participation and upgrading in GVCs improve firms’ performance while enlarging the wage inequality of skills, which emphasizes the importance of training for unskilled workers (Chapter 4). Moreover, servicification of manufacturing highlights the importance of service trade liberalization on manufacturing development(Chapter 5).