Global value chains : measurement, trends and drivers.
Date: 2022-01-30
Institutions: European Central Bank
Subjects: coronavirus disease, economic integration, globalisation, multinational enterprise, trade policy, trading operation, value chain

Occasional Paper Series 

Simone Cigna, Vanessa Gunnella, 
Lucia Quaglietti 

Global value chains: measurement, 
trends and drivers 

No 289 / January 2022 

Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). 
The views expressed are those of the authors and do not necessarily reflect those of the ECB. 

 
 
 
 
Contents 

Abstract 

Non-technical summary 

1 

2 

Introduction 

Tracking GVCs: measurement and recent trends 

2.1  Measuring GVC participation 

2.2  Recent trends in GVCs 

Box 1 The role of MNEs in GVCs 

Box 2   A new tracker of GVC participation 

3 

Drivers of GVC participation 

3.1 

Factors contributing to the early rise of GVC participation 

3.2  Drivers of the recent slowdown in GVC participation 

Box 3 Drivers of GVC participation: a gravity approach 

4 

The role of GVCs in the international transmission of shocks 

4.1 

Literature review 

4.2  GVCs and the international transmission of shocks: recent 

experiences 

Box 4   The impact of the COVID-19 shock in China on GVCs 

5 

Discussion: the future of GVCs 

References 

2 

3 

4 

6 

6 

11 

14 

22 

24 

24 

28 

32 

36 

36 

38 

46 

48 

50 

Global value chains: measurement, trends and drivers – Contents 

1 

 
 
 
Abstract 

Global value chains (GVCs) have shaped the dynamics of globalisation in recent 
years. This paper reviews key concepts and tools to measure countries’ involvement 
in GVCs, explores recent trends and investigates the underlying drivers of GVC 
participation empirically. The analysis in the paper finds that in the last decade, 
GVCs have undergone an important transformation, with participation falling on the 
back of rising trade costs and the trade integration of some large emerging market 
economies slowing, while the role of recent technological developments remains 
unclear. In addition, supply chains appear to have become increasingly regional over 
time. The paper also offers an insight into the role of production chain linkages in the 
transmission of recent global shocks across countries, uncovering important 
amplification effects on trade and activity. Finally, it discusses future prospects for 
GVCs and global trade, including in the light of developments associated with the 
coronavirus pandemic. 

Keywords: global value chains, globalisation, trade slowdown, gravity equation, 
COVID-19. 

JEL codes: F13, F14, F15, F23, F62. 

Global value chains: measurement, trends and drivers – Abstract 

2 

 
 
Non-technical summary 

Global value chains (GVCs) have emerged as a dominant paradigm of production 
over the past 40 years, reshaping the character and speed of globalisation. One 
effect is that the pace of growth in world trade has outstripped that of world GDP, 
rising more than two times faster in the period from 1995 to 2010. Participation in 
GVCs has enhanced productivity growth, supporting wages and incomes. At the 
same time, rising vertical linkages have strengthened countries’ interconnectedness, 
magnifying the transmission of shocks. Set against this backdrop, this paper reviews 
trends and drivers of GVCs, and their implications for the international transmission 
of shocks. The analysis indicates that after decades of continued growth, 
participation in GVCs appears to have stalled, contributing to a decline in world trade 
growth and to lower trade elasticity. At sector level, there has been a continued 
marked rise in value added trade in services, while sectors that had contributed to 
the earlier rise of vertical specialisation have experienced a retrenchment. The 
regional character of GVCs has also strengthened, especially within Asia and 
Europe. We also find evidence that supply chains played an important role in the 
international propagation of recent major events, including the COVID-19 pandemic, 
the United States-China trade dispute and the recent departure of the United 
Kingdom from the European Union, magnifying the impact on activity and trade. The 
future of GVCs remains deeply uncertain at this stage. Many of the forces that 
contributed to their earlier rise have gone into reverse over the past decade, 
contributing to a slow expansion of GVC participation globally. Trade costs, including 
transport costs and tariff and non-tariff barriers, have been on the rise since the 
global financial crisis, making it more costly for firms to offshore production across 
different jurisdictions. And several emerging economies which had been among the 
main protagonists of the earlier rise have been gradually turning inward, reducing 
their reliance on imported inputs. In addition, preliminary evidence indicates that new 
technologies related to Industry 4.0 may discourage further offshoring to emerging 
economies, although the long-term impact remains uncertain. Against this 
background, the COVID-19 pandemic has highlighted the vulnerability of complex 
supply chains but also their role in cushioning domestic shocks. The debate on 
reshoring stages of production domestically as a way of increasing the resilience of 
supply chains is thus still ongoing. 

Global value chains: measurement, trends and drivers – Non-technical summary 

3 

 
 
1 

Introduction 

Over the last 40 years, global value chains (GVCs) have emerged as dominant 
paradigms of production. Advances in information and transport technologies, 
coupled with declining trade barriers, since the 1980s have prompted firms to 
unbundle production into tasks and stages performed in different countries.1  Hence, 
the value of traded intermediate goods has doubled globally and currently accounts 
for more than 50% of world trade. One consequence is that the pace of world trade 
growth has outstripped that of world GDP growth, expanding twice as fast in the 
period from 1995 to 2010. 2  Multinational enterprises (MNEs) have emerged as 
important players within GVCs. They function as networks and undertake different 
stages of production through their affiliates or via independent suppliers, i.e. on an 
intra-firm or arm’s-length basis. 

Increasing vertical integration comes with important macroeconomic 
implications. Participation in GVCs enables countries to specialise in areas of 
comparative advantage, enhancing productivity growth and supporting wages and 
incomes.3  At the same time, increasing vertical integration can lead to growing 
interconnectedness across countries, serving to accelerate and magnify the 
transmission of shocks. GVCs also have important implications in the context of 
price formation. High linkages in production lead to high synchronicity between 
consumer and producer prices across countries.4  Furthermore, because of high 
interlinkages in production, global economic conditions become relevant in the 
formation of domestic inflation.5  In the light of this, it is important for policymakers to 
monitor the evolution of GVC trade and understand the forces behind it. 

Set against this backdrop, this paper reviews recent trends and dynamics that 
have shaped the pattern of GVC trade in the past decade and assesses the role 
of GVCs in the transmission of recent global shocks. In Section 2, we take stock 
of the changing patterns of GVC participation in the last decade. In addition, we 
introduce a new tracker of regional and global GVC participation which enable us to 
gauge developments in GVCs participation as they enfold in real time. In Section 3, 
we discuss the main drivers of GVC participation from a global and country 

1    See Baldwin (2006). 
2    The increasing trade-to-GDP ratios follow directly from the growing importance of GVCs, as 

intermediates are transferred across borders several times before the goods/services are sold to the 
final customer. Because international trade data are expressed in terms of gross output, they include 
the value of the intermediates imported at each border crossing. By contrast, GDP is a value added 
concept and captures only the domestic value that countries add in the production of goods and 
services. 

3    A number of recent studies attempt to quantify the effects of GVC participation on economic growth. 

Kummritz, Taglioni and Winkler (2017) find that GVC integration generally increases an industry’s value 
added, especially when participating in upstream stages. They additionally highlight the importance of 
country-specific characteristics and policies when it comes to benefiting from trade integration. 
Constantinescu, Mattoo and Ruta (2019) find that participation in GVCs is a significant driver of labour 
productivity. An assessment of the benefits of engaging in GVCs in terms of economic growth and 
productivity is outside the scope of this paper. 

4    See Auer et al. (2017). 
5    Growing participation of euro area countries in global and regional value chains has prompted the ECB 

to rethink the use of conventional trade definitions based on gross trade within the analysis and 
forecasting of the euro area (ECB Working Group on Global Value Chains, 2019). 

Global value chains: measurement, trends and drivers – Introduction 

4 

 
 
 
perspective, shedding light on their relative contribution to the recent slowdown. 
Section 4 focuses on the role of GVCs in the transmission of macroeconomic 
shocks. We conclude by assessing the medium-term outlook for GVCs and trade. 

The analysis in this paper indicates that GVCs have undergone a significant 
transformation in recent years. The pace of growth of GVC participation has 
slowed, in part due to compositional effects triggered by the fact that sectors with a 
low GVC intensity, such as construction and services, have accounted for an 
incrementally larger share of world trade over time. Meanwhile, GVCs have 
maintained a strong regional dimension, especially within Europe and Asia. 

Some of the forces that propelled vertical integration before the global 
financial crisis have reversed over the past decade. Advances in information and 
communication technologies, declining trade costs, the integration into the world 
economy of countries in eastern Europe and East Asia and the surge of MNEs as 
global actors have stalled or even reversed over the past decade, contributing to a 
slower pace of GVC participation. New technologies related to Industry 4.0 have the 
power to transform and reshape the global organisation of production going forward. 
While they could lead to further shortening and regionalisation, the overall direction 
and size of their impact remain ambiguous at this stage. The coronavirus (COVID-
19) pandemic may also exacerbate these trends. 

The analysis in this paper also suggests that supply chains are likely to have 
played an important role in the international propagation of recent major 
events, including the COVID-19 pandemic, the trade dispute between the 
United States and China and the departure of the United Kingdom from the 
European Union. For example, model-based analysis indicates that the 
organisation of production in supply chains amplified the impact of the 2018-19 surge 
in tariffs by more than 70% in the case of the United States and by almost three 
times in the case of China. GVC-related spillovers are also likely to have magnified 
the impact of the COVID-19 shock, amplifying the decline in global imports and 
exports by some 25%. 

Global value chains: measurement, trends and drivers – Introduction 

5 

 
 
2 

Tracking GVCs: measurement and 
recent trends 

This section reviews the key trends and drivers of GVC trade in recent years. 
Section 2.1 focuses on the measurement of GVC linkages and provides some 
illustrations. Section 2.2 discusses recent trends and patterns that have 
characterised GVCs, including the role of MNEs (Box 1), and introduces a new 
tracker of GVC participation (Box 2). 

2.1 

Measuring GVC participation 

The emergence of GVCs has challenged the conventional use and 
interpretation of trade statistics and instigated the use of new data and 
methods. Traditional trade measures record flows of goods and services on a gross 
basis, meaning that the value of intermediate inputs is counted every time they cross 
a border for further processing. Therefore, in a world in which intermediate goods 
cross several borders before reaching the final consumer, gross exports can be 
subject to significant double-counting. This can lead to a misrepresentation of the 
contribution of different countries to global trade. To address these issues, 
researchers and practitioners have increasingly relied on the concept of trade in 
value added. As part of this, gross exports are broken down according to the country 
and industry of origin and destination of value added. In other words, value added is 
traced across borders and apportioned to the countries where it is produced and 
consumed.6 

Building on trade in value added data, several metrics have been developed in 
the literature to track supply chains, including indicators of participation. 
According to Antràs (2020a),7  a GVC consists of “a series of stages involved in 
producing products and services that are sold to consumers, with each stage adding 
value”.8  Borin and Mancini (2015) offer a more specific definition of GVC trade, 

6    Measuring trade according to the value added approach has important implications for trade 

imbalances. For example, in value added terms, the US trade deficit with China is around 20% lower 
than when it is measured on a gross basis. 

7    A value chain includes all activities involved in delivering a product, including the sourcing of raw 

materials and parts, manufacturing and assembly, warehousing, inventory tracking, order entry and 
management, distribution across all channels, customer delivery, and management of the information 
systems necessary to monitor all required activities. See Antràs (2020a). 

8    The term GVC originated in the management literature. In the economic literature it has been 

associated with concepts such as: global production sharing, international fragmentation, vertical 
specialisation, vertical integration, multistage production, subcontracting, offshoring and outsourcing 
and most recently with trade in tasks. The different terms all relate to the increasing importance of 
vertical production and trading chains across countries, and we use them interchangeably in this paper. 
An important distinction emphasised in the literature is between “producer-driven” and “buyer driven” 
chains. Producer-driven GVCs are found in high-tech sectors such as the semiconductor or the 
pharmaceuticals industry. Because these industries rely on technology and research and development 
(R&D), lead firms are placed upstream and control the design of products as well as most of the 
assembly, which is fragmented across different countries. In buyer-driven chains, retailers and branded 
marketers control the production, which can be totally outsourced, the focus being on marketing and 
sales. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

6 

 
 
 
characterised by flows that cross at least two national borders. In this paper we 
adopt their definition, setting GVC-related trade apart from direct trade (both are part 
of gross trade), which refers instead to trade flows crossing only one border (e.g. 
goods and services that are directly exported for final use or are used as inputs in 
production and consumed in the first importing country). Indicators of GVC 
participation track countries’ engagement in GVCs and serve as proxies for the 
fragmentation of the production process. GVC participation is generally computed as 
the share of GVC-related trade over gross exports. 

Figure 1 
Decomposition of country A’s exports to country B. Origin and destination of value 
added 

Domestic value added of A
(e.g. value added in assembly 
and in rubber)

Consumed in B
(e.g. tyres used to produce cars 
sold in B)

Gross exports 
of A to B
(e.g. tyres)

Foreign value added of C (e.g.
steel frames), exported to A

(A’s backward GVC)

Source: ECB. 

Domestic value added of A (e.g.
tyres), exported and further 
processed by B, and 
re-exported by B (e.g. cars) (A’s 
forward GVC participation)

At the broadest level of disaggregation, individual countries can participate in 
GVCs by engaging in backward and/or forward linkages. Upstream or backward 
participation measures the share of foreign value added embedded in a country’s 
total gross exports. The downstream or forward dimension refers instead to the 
share of the domestically produced value added embedded in a country’s exports 
that is further re-exported by the destination country. In this respect, re-exported 
products flow downstream within the value chain. The diagram in Figure 1 provides a 
simplified illustration of tyre production.9  In the example, country A is a manufacturer 
of tyres. In order to produce its exports to B, A can produce and assemble tyres 
domestically (and hence rely on its own domestic value added), or import parts from 
abroad (i.e. embed value added from third countries in the form of inputs in its 
production). Backward participation consists of the value added contained in parts 
(e.g. steel frames) that A imports from a foreign partner C. Forward participation is 
instead obtained by counting the domestic value added produced directly by A (e.g. 

9    Gross exports can be further decomposed into additional sub-components according to the 

decomposition proposed by Borin and Mancini (2015). For example, the domestic value added of A that 
is exported to C could come back to A be further re-processed there and then be exported by A. The 
diagram in the main text is a simplified version. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

7 

 
 
 
 
in the form of labour to assemble the final product and value added contained in 
rubber produced in A), embedded into its exports of tyres to B and further utilised by 
B in the production of exports to a third country D, for example in the form of cars. 
Measures of GVC participation take into account both backward and forward 
dimensions, such that in our stylised example, an overall indicator of participation for 
country A is obtained as the sum of backward (value added in steel frames) and 
forward value added trade (value added in tyres used to produce cars exported by B 
to D) (both highlighted with red boxes), expressed as a share of its total gross 
exports. 

An illustration can help to shed light on the concept of trade in value added. 
Chart 1 decomposes gross exports of goods to the United States (the sum of all 
components of the bar except those in light blue), tracking the origin of value added. 
Taking for example exports originating from the euro area, only around one-third are 
consumed in the United States (blue bars). In fact, a significant share of euro area 
exports to the United States consists of intermediate goods that are used in the 
production of goods in the United States and then consumed in the United States or 
re-exported to third countries (yellow bars). In turn, euro area exports to the United 
States include intermediate inputs from third countries, including from countries that 
are closely embedded in European production chains, such as central and eastern 
European countries in the automotive sector (grey bars). Euro area exports also 
include value added from the United States itself (red bars). Finally, euro area 
exports are sometimes first shipped for processing to third countries, such as 
Mexico, before being exported to the United States (light blue bars).10 

Chart 1 
Production chain linkages in exports to the United States 

(USD billions) 

Exporter’s value added in final goods consumed in the United States
Exporter’s value added in intermediate goods for US final production and exports
Foreign value added in exports (originated in the United States)
Foreign value added in exports (originated in third countries) and double-counted
Exporter’s value added that goes to the United States through other countries

450

400

350

300

250

200

150

100

50

0

CA

CN

MX

JP

KR

Euro area

DE

FR

IT

ES

Sources: World Input-Output Database and authors’ calculations. 

10    The value added represented by the light blue bars does not accrue to bilateral gross exports to the 
United States. It is in fact embedded in the gross exports of exporters to other countries, where they 
are processed and re-exported to the United States. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

8 

 
 
 
 
The type and extent of engagement in GVCs vary across countries. Figure 2 2 
shows the backward and forward linkages of advanced and emerging economies in 
1990 and in 2018. The darker green and blues areas reflect higher values of 
participation across the two categories. Small, open economies or countries that are 
highly involved in the assembly and processing of goods, such as Mexico or 
countries in emerging Europe, tend to be located downstream in the value chain and 
have large backward linkages, originating from the fact that a large proportion of their 
exports consists of foreign value added. Commodity exporters such as Russia and 
countries in the Middle East and Africa are located upstream and instead exhibit high 
forward linkages. The latter reflects the fact that exports of commodities from these 
countries travel along the value chain and serve as inputs in other countries’ 
production. Countries with high forward linkages are not limited to commodity 
exporters, however. The United States and several large euro area economies also 
exhibit high shares due to large exports of high value added services (including 
marketing activities and R&D) that are used as intermediate inputs in other countries. 

For many advanced economies, backward and forward linkages have been 
rising over time (Figure 2). This is an indication of the fact that they engage in 
GVCs in a multifaceted way, through both vertical and horizontal linkages.11 
Movements along the value chain may also be the outcome of deliberate 
government policies. In countries such as China, Indonesia, Thailand and Malaysia, 
for example, forward participation has risen sharply over the past 30 years as a 
result of policies aimed at shoring up the domestic content of their production and 
exports. By contrast, economies in emerging Europe have continued to integrate 
themselves downstream into the supply chains of companies in western Europe, 
such that the foreign content of their exports has increased more visibly. Countries in 
Latin America have also seen the foreign content of their exports rise over time. In 
general (with the exception of Mexico, which is highly integrated in US value chains), 
participation in GVCs remains low among countries in Latin America when compared 
with peers. 

GVCs are complex networks formed of hubs and spokes. Figure 3    shows the 
network structure of GVCs in 1995 and 2015. The nodes represent countries 
involved in GVCs, and the size of each node reflects the magnitude of GVC trade 
(both backward and forward) intermediated by each country (expressed as a share 
of total world exports). The thickness of each link between nodes represents the 
share of value added trade between each country pair. The chart highlights the 
existence of a clear “hub and spoke” structure, with the United States, Germany and 
China serving as key hubs within each region but also as main connectors across 
different regions. The chart also reveals important changes across and within 
regional GVC networks since 1995. Interconnectedness has increased, as more 
emerging economies in Asia, Latin America and emerging Europe have 
progressively engaged in regional supply chains. More importantly, China has 
emerged as a key global player not only by replacing Japan as the main Asian hub 

11    The coexistence of backward and forward integration strategies of firms along GVCs is documented by 

Del Prete and Rungi (2020). 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

9 

 
 
 
but also by rivalling the United States in terms of share of GVC trade over total 
exports. 

Figure 2 
Backward and forward participation (share of gross exports) 

Sources: Eora (Lenzen et al., 2013) and authors’ calculations. 

Figure 3 
GVC networks 

a) 1995 

b) 2015 

Sources: OECD and authors’ calculations. 
Notes: The nodes represent countries involved in GVCs, and the size of each node reflects the magnitude of GVC trade (both 
backward and forward) intermediated by each country and expressed as a share of total world exports. The thickness of each link 
between nodes represents the share of value added trade between each country pair. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

10 

 
 
 
 
 
 
 
2.2 

Recent trends in GVCs 

After more than 20 years of continued growth, the pace of GVC integration has 
slowed globally. The increase came to a halt with the global financial crisis, and 
while the recovery was fast, participation in GVCs started to decline again globally in 
2011 (Chart 2, yellow line). 

Chart 2 
Participation in GVCs 

(percentage shares of gross global exports) 

Nominal GVC tracker
GVC participation

42

40

38

36

34

32

30

28

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

Sources: OECD, Trade Data Monitor and authors’ calculations. 
Notes: For the period 1995-2015, the yellow line represents GVC participation calculated as the sum of backward and forward 
participation. The index was extended backward following the methodology proposed by Johnson (2018). The blue line represents a 
tracker of GVCs built on the basis of selected data on intermediate goods trade. The value for 2021 is calculated as average global 
GVC participation in the first seven months of 2021. For further information on the methodology behind the tracker, see Box 2. 

The deceleration in GVC participation was widespread across countries and 
sectors. Chart 3 shows indices of GVC participation across countries (left panel) 
and sectors (right panel) in 2008 and 2015. The left panel indicates that since the 
global financial crisis, a number of countries have experienced a marked decline in 
GVC integration. The decline was particularly pronounced in emerging market 
economies, including China, and to a lesser extent in advanced economies outside 
the euro area. Conversely, most euro area countries have maintained a steady 
engagement in global supply chains. The decline was also widespread across 
sectors (right panel), with the commodities and manufacturing sectors suffering 
larger drops. By contrast, GVC participation in the services sector was comparatively 
more resilient. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

11 

 
 
 
Chart 3 
GVC participation by country (left panel) and sector (right panel) 

(percentage shares of gross exports) 

China
EMEs excluding China
Other AEs
Euro Area

Agriculture
Commodities
Low/medium-tech manufacturing
High-tech manufacturing
Services

60

50

5
1
0
2

40

30

20

20

30

40

2008

50

60

60

50

5
1
0
2

40

30

20

20

30

40

50

60

2008

Sources: OECD and authors’ calculations. 
Note: The size of the bubbles refers to the share of each individual country and sector in gross exports in 2015. EMEs stands for 
emerging market economies; AEs stands for advanced economies; EA stands for the euro area. 

The decline in the pace of integration since the global financial crisis partly 
reflects changes in the sectoral composition of gross exports. As discussed in 
the previous subsection, participation in GVCs is generally expressed as the ratio of 
GVC-related trade (encompassing both backward and forward linkages) to total 
gross exports. Therefore, global shifts in participation can be driven by developments 
in production fragmentation within countries and sectors, but also by changes in the 
geographical and sectoral composition of gross exports. The latter may reflect the 
fact that countries and sectors which have a structurally low GVC intensity have 
increased their share of world trade over time.12  A simple accounting exercise can 
help disentangle the relative contribution of these two factors to the global decline in 
GVC participation. Chart 4 (left panel) shows that from a geographical perspective, 
both the early rise and the slowdown in global GVC participation since 2008 have 
been entirely driven by changes in the intensity of GVCs across countries. By 
contrast, from a sectoral perspective (Chart 4, right panel), half of the decline since 
2008 is accounted for by the changing composition of gross exports, which has been 
skewed towards industries with a structurally low fragmentation of production, such 
as tourism, transport, financial services and construction. 

12    At global level, GVC participation is obtained as the weighted sum of national and sectoral indexes, 

each expressed as a ratio of GVC trade with the weights determined by a country’s and sector’s share 
of gross global exports. Thus, global changes in participation can also reflect shifts in export shares 
across countries and sectors. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

12 

 
 
 
 
 
Chart 4 
Contributions to changes in global GVC participation 

(percentages and percentage points) 

Changes in countries' GVC intensity
Changes in the geographical composition of gross 
exports
Changes in GVC participation

Changes in sectoral GVC intensity
Changes in the sectoral composition of gross exports
Changes in GVC participation

12

10

8

6

4

2

0

-2

-4

12

10

8

6

4

2

0

-2

-4

1995-2008

2008-2015

1995-2008

2008-2015

Sources: OECD and authors’ calculations. 
Note: The chart shows the contributions to changes in GVC participation over two periods. 

In general, supply chains have retained a strong regional component over 
time, particularly in Europe and Asia. Chart 5 decomposes the GVC participation 
of different regions into the contribution of regional and extra-regional trade. For 
countries in Europe and Asia, and to a lesser extent in North America, GVC 
participation has risen largely on the back of stronger supply linkages within the 
region itself, while countries in Latin America have become integrated in GVCs by 
strengthening linkages with partners from other regions. Since 2011, regional GVC 
links have somewhat weakened in Asia and Latin America, while in other regions 
they have remained broadly constant. Overall, supply chains remain clustered at 
regional level, particularly in Europe and Asia where the majority of supply linkages 
occur within the region itself. For countries in the USMCA13  area, almost half of the 
imported intermediates embodied in gross exports originate within the area. By 
contrast, extra-regional linkages are more pervasive in Latin America. This 
phenomenon has involved both multinational and domestically owned companies, 
which have relocated production to within their region to an equal extent (see Box 1). 

13    The United States-Mexico-Canada Agreement (USMCA) is a trade agreement between the three 
countries that was signed on 30 November 2018 and officially entered into force on 1 July 2020. It 
replaces the North American Free Trade Agreement (NAFTA). 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

13 

 
 
 
   
 
Chart 5 
Contributions to GVC participation 

(percentages) 

Regional 
Extra-regional

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

5
9
9
1

8
0
0
2

5
1
0
2

9
1
0
2

5
9
9
1

8
0
0
2

5
1
0
2

9
1
0
2

5
9
9
1

8
0
0
2

5
1
0
2

9
1
0
2

5
9
9
1

8
0
0
2

5
1
0
2

9
1
0
2

5
9
9
1

8
0
0
2

5
1
0
2

9
1
0
2

Asia

Europe

North America (USMCA)

Latin America

World

Sources: OECD and authors’ calculations. 
Notes: Figures for 2019 are estimates based on regional trackers of GVC participation. For further information, see Box 2. 

Box 1 
The role of MNEs in GVCs 

Prepared by J. Böning, V. Gunnella and L. Segers 

MNEs play a key role in the cross-border organisation of production and GVCs. MNEs have 
emerged as a model for the organisation of production, allowing firms to benefit from lower trade 
and coordination costs and dislocate production where it is more efficient.14  Today, MNEs (domestic 
and foreign) account for more than one-third of global production. Their activity is particularly 
predominant in exports (65%) and GVC-related trade (summarised by imports of intermediate 
inputs, 41%) (Chart A, panel a). When compared with domestically owned companies,15  foreign 
multinationals have a substantially large involvement in GVCs, especially in emerging markets and 
in the euro area (Chart A, panel b). Compared with domestic firms, foreign affiliates of MNEs rely 
more on backward linkages. This reflects the fact that offshoring activity of MNEs relies on foreign 
intermediate inputs and that multinational activity is often related to reprocessing activity in the host 
country. The presence of foreign MNEs is positively associated with foreign value added being 
sourced from the country where these are headquartered. This emphasises the strong GVC ties of 
foreign affiliates with parent companies abroad. 

14    See Baldwin (2006) and Antràs (2003). 
15    Foreign companies comprise all firms with at least 50% foreign ownership. See the OECD AMNE 

Analytical Database for further details. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

14 

 
 
 
 
Chart A 
MNE activity and GVCs 

a) MNE activity 

(percentage shares of total) 

Domestic non-MNEs
Domestic MNEs
Foreign-owned MNEs

100

90

80

70

60

50

40

30

20

10

0

Output

GDP

Exports

Imports of intermediate inputs

b) MNE GVCs 

(percentage shares of total exports) 

AE – domestic-owned
AE – foreign-owned
EA – domestic-owned

EA – foreign-owned
EME – domestic-owned
EME – foreign-owned

50

45

40

35

30

25

2005

2007

2009

2011

2013

2015

Sources: OECD, Borin and Mancini (2015) and authors’ calculations. 
Note: Foreign-owned aggregate includes firms with at least 50% foreign ownership. EMEs stands for emerging market economies; AEs stands for advanced 
economies; EA stands for the euro area. 

The search for market access, vertical integration and lower taxes drive MNEs’ location 
choices. The theoretical literature on foreign direct investment (FDI) indicates that multinational 
corporations operate for market-seeking motives (horizontal integration), efficiency-seeking motives 
(vertical integration) or a combination of the two (complex integration).16  More recently, the focus 
has shifted to the relationship between MNE activity and tax avoidance, with countries with low tax 
regimes and lenient regulations gaining prominence as host countries.17  Chart B reports the ten 
countries (left panel) and sectors (right panel) with the highest share of output attributable to MNEs. 
In terms of countries, foreign MNEs are prevalent and increasing in emerging countries that have 
integrated themselves into European production chains (mostly eastern European countries) and in 
so-called conduit countries (i.e. countries that act as intermediate destinations for offshore centres) 
or countries with favourable corporate tax regimes. In the latter, including in Luxembourg and Malta, 

16    The reader can refer to Grossman et al. (2006). 
17    See Garcia-Bernardo et al. (2017). 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

15 

 
 
 
 
 
MNEs’ production relies largely on foreign value added, whereas in countries where affiliates are 
engaged in reprocessing, the value added content of the host country is significantly more 
prominent. Besides the multinational and concentrated character of specific industries such as 
financial services or wholesale, the right panel of Chart B validates the vertical integration motives 
of MNEs, since the share of foreign MNE output is higher in manufacturing sectors where 
production is organised in multiple stages taking place across borders. At the same time, the chart 
highlights the global character of ownership structures where the share of extra-regional ownership 
is dominant. 

Chart B 
Countries and sectors with higher foreign MNE activity 

a) Foreign MNE activity by country 

(percentage shares of country’s total output) 

2016
2005
Value added for host country; 2016; foreign-owned 
Value added for host country; 2016; domestic-owned

80

60

40

20

0

SG

HK

HU

CZ

SK

LU

RO

IE

BG

MT

b) Foreign MNE activity by sector 

(percentage shares of total global output) 

Intra-regional
Extra-regional

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

l

e
a
s
e
o
h
W

l

i

s
e
c
v
r
e
s

l

i

a
c
n
a
n
F

i

l

s
e
c
h
e
v

i

r
o
t
o
M

l

i

s
a
c
m
e
h
C

i

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c
v
r
e
s

r
e
h
t
O

d
o
o
f

d
e
s
s
e
c
o
r
P

s
t
c
u
d
o
r
p

i

y
r
e
n
h
c
a
M

i

s
e
c
v
r
e
s

t
r
o
p
s
n
a
r
T

l

i

c
n
o
r
t
c
e
e
/
r
e
t
u
p
m
o
C

y
t
i
c
i
r
t
c
e
E

l

y
g
r
e
n
e
d
n
a
g
n
n
M

i

i

Sources: OECD, Borin and Mancini (2015) and authors’ calculations. 
Notes: Value added for host country is the domestic value added in production. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

16 

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign multinationals operate predominantly through regional production networks. 
Besides the canonical categorisations into horizontal, vertical and export platforms, the actual 
configuration of multinationals’ activity is organised into regional production networks where foreign 
affiliates source their inputs from neighbouring countries and sell their output to large markets 
nearby.18  Looking at GVC participation indices of foreign-owned and domestic-owned companies 
(Chart C) is instructive in this regard. Foreign-owned participation in regional production networks is 
significantly higher than in production networks outside the region, as is also the case for domestic-
owned firms. 

Chart C 
Regional and extra-regional GVC participation of foreign-owned and domestic-owned firms 

(percentage shares of gross global exports) 

Foreign-owned: intra-regional GVCs
Foreign-owned: extra-regional GVCs
Domestic-owned: intra-regional GVCs
Domestic-owned: extra-regional GVCs

55

50

45

40

35

30

2005

2007

2009

2011

2013

2015

Sources: OECD, Borin and Mancini (2015) and authors’ calculations. 
Note: Foreign-owned aggregate includes firms with at least 50% foreign ownership. 

Foreign affiliates have reduced their participation in GVCs, reflecting a decline in the 
machinery and chemical sectors in Europe and Asia. Chart C shows a declining trend in GVC 
integration, both for domestic-owned and foreign-owned firms and in extra-regional supply chains in 
particular. Cluster analysis can help to identify those sectors and countries which witnessed the 
fastest decline in GVC participation in the period from 2011 to 2016.19  The analysis identifies two 
main clusters (Chart D). Within those, the machinery and chemical sectors, which tend to be 
characterised by highly fragmented production processes, have undergone a pronounced decline in 
GVC participation, especially in countries in Asia, Europe and North America. This may reflect 
decreasing fragmentation in the specific industries20  as well as the rising participation of lower and 
middle-income countries in the production of intermediate products with higher technological 
content that were previously imported. 

18    Baldwin and Okubo (2014). 
19    The cluster methodology utilises hierarchical clustering with centroid linkage and dynamic time warping 

as a distance metric. See Aghabozorgi et al. (2015). 

20    See Pahl and Timmer (2019). 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

17 

 
 
 
 
 
 
Chart D 
Clusters of foreign-owned country sectors with highest decrease in GVC participation 

(percentage shares of gross exports) 

(percentage shares of gross exports) 

65

60

55

50

45

40

35

75

70

65

60

55

50

2011

2012

2013

2014

2015

2016

2011

2012

2013

2014

2015

2016

(percentage shares of region’s gross exports) 

(percentage shares of region’s gross exports) 

Chemicals
Light manufacturing
Primary

Services
Machinery
Metal products

Chemicals
Light manufacturing
Primary

Machinery
Metal products

20

15

10

5

0

7

6

5

4

3

2

1

0

Asia

Europe

Latin America

NAFTA

Rest of the
world

Asia

Europe

Rest of the world

Sources: OECD, Borin and Mancini (2015) and authors’ calculations. 
Notes: Foreign-owned sectors include firms with at least 50% foreign ownership. The top panels display the time series of GVC participation for each cluster. 
The bottom panels display the share of a region’s gross exports for each sector in the respective cluster. Hierarchical clustering with centroid linkage and 
dynamic time warping as a distance metric has been used. RoW stands for the rest of the world. 

At the same time, Asian and European multinationals have boosted supply chain integration 
within their respective regions. Chart E illustrates the predominant regional character of input 
sourcing and sales destinations for foreign affiliates in value added terms. Moreover, while intra-
regional sales remained broadly stable in the period from 2011 to 2016 in Asia and Europe,21  the 
share of intra-regional inputs (including from the domestic economy)22  increased substantially. 
Besides the aforementioned role of technology, the geographical localisation of supply chains 
underlines the role of policy factors such as lower trade integration and a surge in trade distortions 
at the global level, and risk mitigation motives (see Section 3 and Lund et al., 2020). 

21    Compared with data for 2005, countries in Latin America and Asia show an increase in intra-regional 

sales, highlighting the role of increasing demand from emerging countries in the two regions. While for 
Asia this phenomenon has both a domestic and regional dimension, for Latin America it is mostly 
domestic. 

22    In Europe, notable exceptions are countries such as Ireland, Malta and Cyprus, which moved towards 
sourcing inputs from extra-European countries, most likely in relation to US parent companies’ activity. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

18 

 
 
 
 
 
 
 
Chart E 
Foreign affiliates’ value added 

(percentage shares of total value added) 

Asia
Europe

Latin America
NAFTA

a) 2011

b) 2016

s
e

l

a
s

l

i

a
n
o
g
e
r
-
a
r
t
n

I

95

90

85

80

75

70

65

60

55

50

45

s
e

l

a
s

l

i

a
n
o
g
e
r
-
a
r
t
n

I

95

90

85

80

75

70

65

60

55

50

45

75

80

85

90

95

100

75

80

85

90

95

100

Intra-regional inputs

Intra-regional inputs

Sources: OECD AMNE Database, Borin and Mancini (2015) and authors’ calculations. 

From a sectoral perspective, there has been a visible rise of services in value 
added exports. Services are often referred to as the glue that holds value chains 
together. They allow different production stages of manufacturing to be linked across 
countries, including in the form of transport and telecommunications, effectively 
allowing GVCs to exist. According to traditional trade statistics, services trade 
accounts for around 20% of world gross trade. When measured according to a value 
added approach, it represents around 50% of gross value added trade – up from 
30% in 1995. The value added of services is often bundled into manufacturing 
activities and therefore exported as manufacturing goods, which explains the larger 
share in value added trade.23  The share of value added in manufacturing production 
attributable to services has also increased over time. In 2015, services accounted for 
around 30% of global value added in manufacturing, up from 20% in 2005. 24 

Falling GVC participation has dampened the trade elasticity of income over 
time. Another dimension of the reduced GVC participation since the global financial 
crisis has been its role in driving patterns of country and global income elasticity of 
trade. In order to gauge the quantitative impact of the expansion of GVCs on global 
trade elasticity, we updated the decomposition proposed in the ECB IRC Task Force 

23    See Heuser and Mattoo (2017). 
24    In general, the nature of GVC participation by the services and manufacturing sectors is markedly 
different, with services exhibiting comparatively more forward linkages (as they serve as inputs in 
manufacturing activity). In addition, instead of following a linear value chain in which products move 
sequentially from upstream to downstream, adding value at each stage, they follow a “snake” formation 
in the terminology of Baldwin and Venables (2013). 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

19 

 
 
 
 
 
 
report of 2016. Specifically, we decompose25  the trade elasticity into three 
components: the long-run unit elasticity, the income elasticity related to the intensity 
of GVC trade and a residual factor relating to the income elasticity of the non-GVC-
related import content of final demand. We find that in the period from 1996 to 2000, 
GVC expansion raised income trade elasticity by more than 0.9 percentage points. In 
the early 2000s, the contribution declined to 0.1 percentage points (Table 1). During 
the recession, the average contribution dropped to around zero, where it has 
remained since. Overall, the analysis suggests that the contraction in global trade 
elasticity since 1996 can be accounted for by a combination of declining income 
elasticity related to the intensity of international fragmentation and declining non-
GVC-related imports of similar size. 

Table 1 
Contributions to the global income elasticity of trade 

(trade-to-income elasticity and contributions) 

1996-2000 

2001-2007 

2008-2015 

2016-2019 

GVCs 

Others 

Long-term 

Trade elasticity 

0.94 

0.10 

-0.08 

0.02 

0.92 

0.13 

-0.1 

0.02 

1 

1 

1 

1 

2.86 

1.23 

0.82 

1.04 

Source: ECB computations based on Borin and Mancini (2015). 
Note: For further details on the methodology behind the computations, see footnote 25. 

A new tracker allows us to gauge recent developments in GVC participation. 
The scarce availability of harmonised and timely input-output (IO) data poses some 
challenges in tracking GVC participation. Global IO tables are generally published 
and updated with long lags, which makes it difficult to gauge changes in the global 
production structure in real time. To address the lack of up-to-date IO tables, we 
have developed a timely quarterly tracker of GVC participation. As shown in Chart 2, 
the tracker (blue line) displays a good correlation with standard measures of GVC 
participation based on global IO data (yellow line), and it is therefore useful to gauge 
changes in the global production structure as they enfold. The tracker suggests that 
between 2015 – the last year for which IO tables are available – and 2019, GVC 
participation remained broadly stable. Box 2 provides further information on the 
methodology described above. 

25    Expressing total imports Mt as the sum of non-GVC-related (“Ricardian”) trade 

 and GVC-related 

=

𝑀𝑀𝑅𝑅

, where 

trade Gt, global imports can be written as 
 denotes the level of global GDP 
and the ratio Mt/Rt ≡ GVCMt* is a measure of international fragmentation of production strictly related 
𝑀𝑀𝑅𝑅𝑅𝑅𝑅𝑅
to GVCs. The second ratio Rt/Yt ≡ DMFDt measures the direct (non-GVC-related) import content of 
final demand. Taking log differences, dividing through by the log difference of GDP and averaging 
growth rates over a given sample period {s}, we can decompose the global trade elasticity into three 
components: the long-run unit elasticity, the income elasticity of international fragmentation intensity 
(
of final demand (
𝜂𝜂𝑅𝑅
contract, the contribution from the GVC-related component is zero. 
𝑠𝑠𝑠𝑠

) and a residual factor relating to the income elasticity of the non-GVC-related import content 
. Note that when GVCs neither expand nor 

𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠

𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠

𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅

 =1+

𝑠𝑠𝑠𝑠𝑠𝑠

𝑠𝑠𝑠𝑠𝑠𝑠

𝑠𝑠𝑠𝑠

𝑠𝑠𝑠𝑠

𝑅𝑅𝑅𝑅

𝑅𝑅𝑅𝑅

𝑅𝑅𝑅𝑅

𝜂𝜂𝑅𝑅

𝜂𝜂𝑅𝑅

𝜂𝜂𝑅𝑅

𝜂𝜂𝑅𝑅

): 

𝑠𝑠

𝑠𝑠

+

,

,

,

,

,

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

20 

 
 
 
 
 
 
 
 
 
 
Chart 6 
Contributions to trade growth by sector (left panel) and contributions to trade growth 
in intermediate goods by region of economic activity (right panel) 

(yearly percentage changes) 

Capital
Consumer
Energy

Intermediate
Others
Total

AE (excl. EA)
Asia (excl. CN)
China
CIS

Africa & Middle East
CEE
Latin America
Total

10

5

0

-5

-10

-15

-20

4

2

0

-2

-4

-6

-8

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2020

2020

Sources: Trade Data Monitor and authors’ calculations. 
Note: Data refer to nominal trade in goods. 

The COVID-19 pandemic hit supply chains particularly hard, but GVC trade 
recovered quickly in the second half of 2020. Somewhat surprisingly, our tracker 
indicates that participation in GVCs may have risen in 2020 (Chart 2), reflecting the 
fact that during the pandemic, GVC-related trade declined by comparatively less 
than trade in final goods (see Section 3 on the impact of COVID-19 on GVCs). Chart 
6 corroborates this. It indicates that in the first quarter of 2020, trade in intermediate 
goods declined sharply. This reflects a large contraction in China (right panel). As 
China started to recover in the second quarter, trade in intermediate goods also 
bounced back, cushioning the slowdown at global level. By contrast, trade 
contracted more sharply in other sectors of the global economy, particularly in the 
energy sector, contributing to the overall fall of world trade to a large extent (Chart 6, 
left panel). Our tracker indicates that participation in GVCs expanded further in the 
first half of 2021 as intermediate goods trade grew at a sustained pace,26  possibly 
reflecting a rebuilding of inventories driven by the post-pandemic recovery. 

26    See Exports of intermediate goods gain momentum in Q2 with 47% year-on-year increase, World 

Trade Organization, 3 November 2021. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

21 

 
 
 
 
 
 
Box 2 
A new tracker of GVC participation 

Global IO tables represent a widely used tool to measure participation in GVCs. These 
provide a complete overview of market transactions across industries and countries, defining the 
nature and use of value added (intermediate and final) by the country of origin and destination. The 
tables are constructed by connecting national IO tables across borders using bilateral trade data. 27 
Global IO tables can be used to compute several relevant metrics, including widely reported 
measures of GVC participation. 

Global IO tables are generally published and updated with long lags, which makes it difficult 
to gauge changes in the global production structure in real time. A number of databases that 
enable analysis of trade through the lens of GVCs are now available. While comparable in terms of 
methodology, they differ with respect to the time horizon, countries and sectors covered.28  The 
tables produced by the Organisation for Economic Co-operation and Development (OECD) cover 
the period from 1995 to 2018 and are among the most widely used. Producing and updating the 
tables is a data-intensive exercise requiring country-level data on value added flows. As a result, 
the tables are published irregularly and with long lags, which precludes the possibility to produce 
timely assessments of developments in GVC trade and the cross-border organisation of production. 
Generally, this does not represent a major stumbling block, as GVCs tend to be stable and develop 
only slowly over time. This stems from the fact that once investments have been made, they are not 
quickly reversible and it is cumbersome for firms to rearrange production. However, there are 
instances whereby specific shocks can alter the international structure of production relatively fast, 
such as in the case of a trade dispute that involves export bans of certain products or as a result of 
a shutdown of production in goods and services (as seen in the context of the lockdowns imposed 
to counteract the COVID-19 pandemic). In both cases, bottlenecks in production can arise quickly, 
significantly disrupting businesses along the entire chain. 

To address the lack of up-to-date IO data, we have developed timely quarterly trackers of 
GVC participation that rely on trade in intermediate goods. Our trackers are informed by 
nominal data on intermediate goods trade, which are easily and timely available at monthly 
frequencies through several sources. These provide information over a longer time span and are 
available with a lag of only one quarter. Trends in intermediate goods trade are indicative of GVC 
formation since fragmented production processes require that parts, components and partially 
manufactured sub-assemblies cross borders before final goods are produced and shipped to final 
markets (Arndt and Kierzkowski, 2001). As the fragmentation of production across countries has 
grown, trade in intermediate goods has incrementally become an important driver of world trade. In 
2009, world exports of intermediate goods exceeded the combined export values of final and capital 
goods, with intermediate inputs making up more than half of the total goods imported at global level 
and close to three-quarters of the imports of large developing economies such as China and Brazil. 
For the purpose of our tracker, we have selected a specific category of intermediate goods, namely 
those classified as generic intermediate goods by the United Nations (2019).29  These appear to be 

27    For an in-depth review of macroeconomic and microeconomic approaches to measuring GVCs, see 

Johnson (2018). 

28    These include the Trade in Value-Added Statistics (covering 66 countries), the World Input Output 
Database (43 countries), and most recently the Eora Multi-Region Input-Output (MRIO) database 
(henceforth referred to as Eora (Lenzen et al., 2013) for 189 countries. 

29    The tracker is built as simple ratio of generic intermediate imports and exports as a share of total 

imports and exports. Data are standardised. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

22 

 
 
 
 
better correlated with standard measures of GVC participation based on IO data than input goods in 
so far as they better proxy the whole set of upstream and downstream activities associated with 
GVC participation. A simple rolling correlation between imports and exports could also be regarded 
as a valuable and timely proxy for GVC participation. However, this is more useful to gauge slow-
moving trends, as correlations need to be computed over a time window (usually a few years).30 

Our newly developed tracker accurately traces GVC participation over time. While trade in 
intermediate goods does not exactly match the cross-border production-sharing activities included 
in GVC trade on a one-to-one basis,31  our tracker correlates well with standard measures of GVC 
participation based on world IO tables. This is shown in Chart 2, which plots together an IO-based 
index of GVC participation (yellow line) and our newly developed GVC participation tracker (blue 
line). The measure of GVC participation is constructed by using OECD IO tables and employing the 
aforementioned definition by Borin and Mancini (2015). The two series co-move over time, with a 
correlation of 95% over the period between 2000 and 2015, the last year available in the OECD IO 
tables. We have also developed similar trackers at regional level, including for Europe, North 
America, Asia and Latin America. Correlations with standard indices of GVC participation from 
OECD IO tables vary between 90% and 95%. 

30    See ECB Working Group on Global Value Chains (2019) and Frohm (2020). 
31    For example, in the case of imported intermediate goods that are consumed domestically, crossing 

therefore only one border. 

Global value chains: measurement, trends and drivers – Tracking GVCs: measurement and 
recent trends 

23 

 
 
 
 
3 

Drivers of GVC participation 

This section reviews the main forces driving GVC participation from a global and 
country-specific perspective, with a view to assessing the contribution of different 
factors to the recent slowdown. Section 3.1 describes the factors that contributed to 
the early rise of GVC participation globally. Section 3.2 illustrates how these factors 
have evolved over the past decade. 

3.1 

Factors contributing to the early rise of GVC participation 

The literature ascribes the fast growth of vertical integration to a combination 
of policy measures and technological advancements. 32  Rapidly falling transport 
costs in the early nineteenth century enabled a dislocation of consumption and 
production across advanced economies, paving the way for the first unbundling. 
Nevertheless, production remained geographically clustered due to high 
communication costs, which required technical resources to be physically near other 
factors of production. Measures of transport costs are scant, but a proxy often 
deployed in the literature is the CIF-FOB margin. This can crudely be obtained by 
dividing the price of world imports including the cost of insurance and freight (CIF) by 
the price of world exports declared free on board (FOB). This margin, which in 
general exhibits some volatility, has been falling steadily since 1970 (Chart 7, left 
panel). As the price of shipping has dropped, container fleets have risen rapidly. 

Advances in technology further revolutionised global production in the 1990s, 
leading to a second unbundling (Baldwin, 2016). 33  With the ICT revolution, the 
cost of organising and managing complex activities over long distances declined 
rapidly, both within and between companies, allowing MNEs to dislocate production 
in emerging market economies and take advantage of wage differentials. Analysis by 
Antràs (2021) indicates that the processing power and memory capacity of 
computers has doubled approximately every two years since the 1970s. At the same 
time, the cost of transmitting information over optical networks has decreased by half 
roughly every nine months. The number of internet users has also increased sharply, 
from around 0.4% of the world population in 1990 to around 50% in 2017, which 
amounts to a doubling of internet users roughly every two years (Chart 8, left panel). 

The biggest impact of the ICT revolution has been on services trade. While 
global goods trade has fallen relative to GDP, trade in services is moving in the 
opposite direction, rising twice as fast as global goods trade since 2003. Services 
allow different production stages of manufacturing to be linked across countries, 
including in the form of transport and telecommunications, effectively allowing GVCs 
to exist. Within services trade, digital trade flows have tripled (Chart 8, right panel). 

32    See Baldwin (2006) and Antràs (2020a). 
33    While the steam revolution was responsible for the first unbundling between production and 

consumption in the first half of the twentieth century, ICT, in particular communication technology, led to 
a second unbundling of production activities in the 1980s. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

24 

 
 
 
The deployment of ICT has also meant that GVCs have become more knowledge-
intensive over time, reflecting rising investment in intangible activities and asset-light 
forms of production. 

Chart 7 
World transport costs 

(left-hand scale: percentage of imports; right-hand scale: million 
tonnes) 

(indices) 

CIF/FOB ratio (left-hand scale)
World air freight (right-hand scale)
World container fleet (right-hand scale)

Shanghai Shipping Exchange 
FBX China to Europe (left-hand scale)
FBX China to US West Coast (left-hand scale)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

2,500

3,500

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

2,000

1,500

1,000

500

0

3,000

2,500

2,000

1,500

1,000

500

0
2011

2013

2015

2017

2019

1978 1984 1990 1996 2002 2008 2014

Sources: IMF, Haver and authors’ calculations. 
Note: We deducted 1 from the CIF/FOB ratio, so that the measure approximates transport costs as a percentage of imports. 

Chart 8 
Number of internet users and world trade by sector 

(percentage share of world population) 

(index: 2003=100; percentages) 

Internet users

Trade in goods
Trade in services
ICT service exports
Royalties and licence fees (right-hand scale)

60

50

40

30

20

10

0
1990

1995

2000

2005

2010

2015

200

180

160

140

120

100

80

2003

2006

2009

2012

2015

2018

Sources: IMF, Haver, World Bank and authors’ calculations. 
Note: Trade in goods, trade in services and ICT service exports are expressed as shares of world GDP, whereas royalties and license 
fees are expressed in US dollars. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

25 

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

310

260

210

160

110

60

 
 
 
 
 
 
 
 
Various waves of trade liberalisation in the 1990s led to a sharp and broad-
based reduction of tariffs, especially in emerging market economies, thus 
further enhancing trade integration. Tariff rates and national indices of GVC 
participation display a negative correlation over time (Chart 9), implying that 
countries which apply lower tariff rates are more amenable to GVC participation, but 
also that the steady decline in tariffs across countries since 1980 has fuelled GVC 
integration on a global scale. As the level of tariffs declined, trade policy uncertainty 
was also reduced, as highlighted by binding commitments that countries made when 
entering the General Agreement on Tariffs and Trade (GATT) and World Trade 
Organization (WTO) or signing regional trade agreements. In other words, not only 
had tariffs reductions an immediate impact, but there was also the general sense 
that the institutions being put in place would be effective in precluding the 
reinstatement of protective trade measures. The empirical literature corroborates this 
evidence. Conconi et al. (2018) study the implications of the “rules of origin” of the 
North American Free Trade Agreement (NAFTA) and show that the latter have led to 
a noticeable increase in intermediate goods from the United States and Canada, 
while imports from third countries have fallen. 

The rise of preferential trade agreements (PTAs) has also favoured 
participation in GVCs. PTAs have become more comprehensive over time, often 
encompassing policy areas that go beyond traditional trade policy such as 
investment, competition and intellectual property rights protection (Fernandes et al., 
2021). The literature suggests that countries sign “deep” agreements to promote and 
facilitate the smooth operation of GVCs. Analysis by Laget et al. (2018) shows that 
adding a policy area to a trade agreement increases both forward and backward 
GVC linkages. At the sectoral level, the positive impact of deep trade agreements is 
found to be greater for higher value added industries, suggesting that deep 
agreements help countries to integrate themselves in industries with higher levels of 
value added. 

Chart 9 
Country average tariff rates and GVC participation 

(percentages; percentage shares of gross exports) 

1996-2000
2016-2019

e
t
a
r

f
f
i
r
a
t

e
g
a
r
e
v
A

20

15

10

5

0

20

30

40

50
60
GVC participation

70

80

90

Sources: World Bank, OECD and authors’ calculations. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

26 

 
 
 
 
 
In addition to policy factors and technological advancements, available 
studies also highlight the role of countries’ structural characteristics and 
institutional factors. Specifically, these affect the extent and the type of countries’ 
engagement in GVCs.34  For example, countries characterised by a large domestic 
market tend to rely on few foreign inputs for their production of exports and 
specialise instead in upstream activities. In addition, as shown in Section 2, countries 
at an early stage of their economic development tend to specialise in commodity-
related value chains, posting high forward linkages, or in manufacturing activities 
with low value added content. Once they have reached a more advanced stage of 
development, countries start specialising in more complex activities. 

Beyond specific characteristics and endowments, a broad range of policies 
and institutions also determine the degree of a country’s engagement in GVCs. 
By becoming part of a GVC, firms enter into relationship-specific investments which 
often involve the exchange of highly customised inputs on a repeated basis. Antràs 
(2021) indicates that firms spend significant time and resources designing the 
organisational structure of these production networks and are therefore subject to 
high reputational and transaction costs. In this regard, low quality institutions and a 
poor business environment tend to be detrimental to the viability of GVCs, as they 
increase the contractual risks faced by firms and the propensity of firms to invest. 

Productivity and cost differentials across countries are also an important 
determinant of firms’ decisions to offshore parts of the production process 
and whether to do so through FDI, with subsidiaries providing inputs to their 
parent firms or via arm’s-length trade. Therefore, openness to FDI is also strongly 
associated with the rise of GVCs, particularly backward participation in GVCs (Chart 
10). This stems from the fact that FDI has often been aimed at establishing 
processing facilities in the receiving country, especially in the case of “vertical MNEs” 
that import intermediates for production and export a large share of final products 
(see Box 2 on the global role of MNEs). FDI takes place when multinational firms 
establish operations in foreign countries. Often, the motivation is to produce in the 
host nation products that were previously exported from the home nation, in order to 
take advantage of labour cost differentials. To the extent that this occurs, FDI and 
home nation exports can be treated as substitutes. However, it is often the case that 
the operations of a multinational firm are vertically linked, such that an increase in 
activity in the host country generates increased demand for intermediate products 
(including capital goods) from the country of origin. In addition, marketing and 
distribution capabilities created by FDI can enable the home nation operations to 
export final goods and services to customers that would not be reached in the 
absence of FDI. To the extent that either of these happens, home country FDI and 
exports can be considered as complements. 

34    See Kowalski et al. (2015). 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

27 

 
 
 
Chart 10 
FDI and GVC backward participation 

(logarithms) 

1995-2000
2001-2005
2006-2010

2011-2015
2016-2019

2.0

1.5

1.0

s
w
o
l
f
n

i

I

D
F

0.5

0.0

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

GVC participation

Sources: OECD, Haver and authors’ calculations. 

3.2 

Drivers of the recent slowdown in GVC participation 

Many of the factors that enabled fast GVC integration since the first unbundling have 
worked in reverse in the last decade, contributing to the decline observed in the data. 

Rising global protectionism is likely to have contributed to a slower pace of 
GVC integration. Following the global financial crisis, the reduction of tariff rates has 
tapered off (Chart 9). At the same time, the use of regulatory measures and non-tariff 
barriers, such as export subsidies, restrictions on licensing or FDI and domestic 
clauses in public procurement, has increased, leading to an overall surge in trade 
distortions (Chart 11). Protectionist tendencies have intensified further in recent 
years, culminating in the trade dispute between the United States and China and the 
departure of the United Kingdom from the European Union.35  With the onset of the 
COVID-19 pandemic, protectionist trends were further exacerbated, especially in the 
first half of 2020. More than 1,900 new restrictive interventions were imposed in 
2020 – 600 more than the average of the two previous years – with the latter being 
already elevated as a result of the intensification of the China-United States trade 
dispute and the new wave of protectionism. In the first half of 2020, export 
protectionism has particularly risen in prominence, mainly on the back of country 
restrictions on shipments of essential medical supplies and personal protective 
equipment.36 

35    For an assessment of the impact of the United States-China trade dispute and the United Kingdom’s 

exit from the European Union, see Section 4. 

36    The WTO has encouraged its members to exercise maximum restraint in the use of export restrictions 
and other measures that could disrupt supply chains and has also called on members to improve 
transparency on any new trade-related measures introduced as a result of the COVID-19 pandemic. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

28 

 
 
 
 
 
 
 
The enhanced volatility of transport costs and energy prices represents a 
further possible driver of the slowdown in GVC integration over the last 
decade. The decline in transport costs, proxied by the CIF-FOB margin, seems to 
have come to a halt after the global financial crisis, while volatility has increased (see 
Chart 7, left panel). Volatile oil prices and a growing imbalance between supply and 
demand for freight transport services have been singled out as two important 
determinants. Russell et al. (2014)37  indicate that these factors may have pushed 
companies to make transport-driven shifts in their supply chain strategies in recent 
years, including a shift from offshoring to nearshoring sourcing strategies to reduce 
the number of miles shipments travel. More recently, one of the side effects of the 
COVID-19 pandemic has been the sharp increase in shipping rates globally. 
Measures of shipping rates, including the Shanghai Containerized Freight Index that 
is based on weekly spot container freight rates (exports) from the port of Shanghai, 
have more than tripled since early 2020 (Chart 8, right panel).38 

Declining FDI flows are also linked to the recent moderation in GVC 
participation. The pace of FDI growth has slowed down markedly after the global 
financial crisis, falling to an average annual pace of 4% in the period from 2010 to 
2019, a decline of 20 percentage points compared with the decade preceding the 
crisis. The moderation reflects a pronounced fall of inflows into advanced economies 
amid falling rates of returns. The COVID-19 pandemic had a deep impact on FDI, 
exacerbating the declining trend. Data from the United Nations Conference on Trade 
and Development (UNCTAD) indicate that global FDI suffered its sharpest decline on 
record in 2020 (falling by 42% year-on-year), reaching a level last seen in 2003. 

Rising labour costs in emerging market economies represent a further driver 
of slowing GVC integration. The sustained rise of income in emerging economies 
in the last two decades has gradually put upward pressure on wages, eroding 
competitiveness and cost differentials vis-à-vis advanced economies, and thereby 
reducing the incentive for MNEs to offshore production. With the exception of 
Mexico, most emerging market economies both in Asia and in emerging Europe 
have seen a steady rise in unit labour costs in the last two decades, significantly 
outpacing those in the United States and the euro area. However, the gains from 
specialisation do not rely solely on factor price differences across countries but can 
also stem from idiosyncratic cross
and sectors. A large share of multinational firm activity takes place between 
‐
countries with similar relative factor endowments and factor prices. 

country productivity differences for different goods 

While ICT developments unequivocally boosted GVC participation, the impact 
of new technologies related to Industry 4.0 remains uncertain. Industry 4.0 
refers to the emergence and diffusion of a wide range of new digital industrial 
technologies broadly related to the Internet of Things, digitalisation, artificial 

37    See Russell et al. (2014). 
38    The increase in shipping costs likely reflects a combination of demand and supply factors. In the wake 

of the pandemic, consumers have diverted expenditure from services (which have borne the brunt of 
restrictions) to consumer goods. And since consumer goods are more heavily traded, this has resulted 
in a surge in demand for containers and shipping services. The effect on supply chains has been 
exacerbated by the effects of the pandemic itself, with severe bottlenecks emerging through 2021, the 
new post-Brexit regulatory regime that came into force at the start of this year has led to increased 
trade friction between the United Kingdom and European Union. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

29 

 
 
 
intelligence, robotics and automation and 3D printing, among others. On the one 
hand, technologies related to robotics and automation have the potential to boost 
productivity and capacity utilisation in high income countries, making labour arbitrage 
vis-à-vis emerging and developing countries less appealing. This could prompt 
MNEs to reshore production back to advanced economies. In addition, the use of 3D 
printing has received new impetus, as it can shorten supply chains and accelerate 
time to market. On the other hand, technologies associated with growing 
digitalisation and the adoption of digital platforms are likely to further drive down the 
cost of cross-border communication and transactions, encouraging further 
production fragmentation. Evidence on the impact of new technologies on GVCs is 
scant, and the available studies do not come to conclusive evidence. De Backer et 
al. (2018) find a negative association between robotics investment and the growth of 
offshoring in the period from 2010 to 2014. Likewise, Dachs et al. (2017) find a 
positive relationship between reshoring and an index of Industry 4.0. Model-based 
simulations by the WTO indicate that the impact of technologies related to Industry 
4.0 on the organisation of value chains may be limited.39 

Chart 11 
New trade measures 

(numbers) 

Trade restrictions
Trade restrictions excluding the United States
Trade liberalisations

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Sources: Global Trade Alert and authors’ calculations. 
Note: Data exclude late reports for the respective reporting year (the cut-off date is 31 December of each year). 

Results from panel estimations confirm the findings from stylised evidence. 
We investigate what drives GVC participation from an empirical perspective, relying 
on a gravity equation for a panel of 57 countries over the period from 1995 to 2015 
(further information on the approach used and detailed results are shown in Box 3). 
Our analysis indicates that being part of a common PTA and the presence of large 
bilateral FDI inflows lead to higher value-added flows between two countries. 
Specifically, a 1% increase in FDI inflows is associated with a 0.2 percentage point 
surge in bilateral value-added trade. Regional integration through trade and 
investment agreements in South-East Asia, North America and eastern Europe has 
been linked to the emergence of large international production networks in these 
regions. Our analysis supports this, showing that the presence of a common PTA 

39    See WTO (2019). 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

30 

 
 
 
 
leads to an increase in value added trade of 0.5 percentage points. Common gravity 
variables are also important determinants of GVC participation. Countries that are 
geographically apart tend to engage less in value added trade, as well as those that 
do not share languages and historical ties. Using a dataset of bilateral import flows 
that covers 5,000 products and more than 200 countries over the period from 1998 
to 2011, Conconi et al. (2020) show that intermediate goods are indeed more 
sensitive to distance than final goods and that differentiated inputs exhibit the highest 
distance elasticity. 

Economic, policy and institutional factors are also found to be important 
determinants of GVC integration. Our empirical results suggest that the level of 
economic development (proxied by GDP per capita) and the degree of 
industrialisation of the economy (proxied by the share of manufacturing value added 
in GDP) are positively associated with high backward linkages. Meanwhile, labour 
costs and backward GVC participation display a negative association, in line with the 
literature which suggests that low labour costs are an important factor behind 
offshoring of production. Sound institutions, including effective rules of law and an 
enabling business environment, also favour the establishment of backward linkages, 
with an increase of 1% in agents’ confidence in their own country’s rules of law 
leading to higher engagement in backward participation of 0.2 percentage points. 
Finally, the more general policy environment, including spending on education and 
the tax burden, is also an important determinant. Chart 12 summarises the estimated 
contributions of policy, economic and institutional drivers to GVC integration of the 
countries covered in our panel in the period from 1995 to 2015. Half of the increase 
in GVC integration between 1995 and 2008 can be ascribed to more favourable 
policies, including falling tariff rates, rising participation in PTAs and higher spending 
on education and R&D. Enhanced institutions and stronger economic growth 
account for the other half of the increase. Likewise, the decline between 2008 and 
2015 reflects a lower contribution of the policy drivers to a large extent, compounded 
by falling economic activity and a less favourable institutional set-up. The role of 
technological progress is difficult to pin down in isolation, as it is often bound to 
policy and economic variables. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

31 

 
 
Chart 12 
Model-based decomposition of global GVC participation 

Policies
Economic factors

Institutions
Total

14

12

10

8

6

4

2

0

-2

-4

-6

1995-2008

2008-2015

Source: Authors’ calculations. 
Notes: The decomposition is based on results obtained from panel analysis featuring a gravity equation. For further information, see 
Box 3. 

Box 3 
Drivers of GVC participation: a gravity approach 

Empirical analysis can help to shed light on the role of different drivers in shaping countries’ 
engagement in GVCs. We rely on a panel analysis featuring a gravity equation to evaluate the 
drivers of GVC participation for a sample of 57 countries over the period from 1995 to 2015. Gravity 
equations are widely used as a workhorse for analysing the determinants of bilateral trade flows. 
The gravity specification has several benefits, including the fact that by controlling for the 
characteristics of the source and destination countries, it provides a suitable framework to address 
possible endogeneity arising in the relationship between GVC participation and its determinants. 
Furthermore, the bilateral perspective embedded in the gravity approach enables a granular 
understanding of the elements that lead countries to engage in supply chains with each other. 

We take the perspective of the importer, in other words a country that receives value added 
from an upstream supplier in the form of inputs, uses these in production and exports the 
processed product to a third destination. We investigate the forces that affect its participation 
within the value chain, proceeding in two steps.40  For any given country pair i and j, we first 
estimate the impact of a set of bilateral determinants, including bilateral FDI inflows, the bilateral 
average tariff rate, the depth of preferential trade agreements and traditional gravity variables such 
as distance, the presence of a common border and common language, on a standard indicator of 
forward GVC participation. The latter is defined as the domestic value added of country i embodied 
in intermediate inputs exported to j, which is processed by j and re-exported to a third country in the 
form of intermediate or final goods. In a second step, we take the perspective of importer j, trying to 
quantify the extent to which its economic, policy and institutional characteristics affect its position 
within the value chain. 

40    One limitation of the analysis is that bilateral value added flows depend not only on bilateral trade costs 
but also on costs in third countries through which value added transits from source to destination. 
Besides difficulties in interpreting gravity results in a standard fashion, empirical complications also 
arise in trying to capture these indirect effects. As shown by Noguera (2012), their relative importance 
can be high, although it varies significantly across countries and types of trade costs. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

32 

 
 
 
 
The gravity equation can be written as follows: 

𝑉𝑉𝐴𝐴𝑖𝑖𝑖𝑖𝑖𝑖 = 𝛽𝛽1𝑃𝑃𝑃𝑃𝐴𝐴𝑖𝑖𝑖𝑖𝑖𝑖 + 𝛽𝛽2𝑅𝑅𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑖𝑖𝑖𝑖 + 𝛽𝛽3𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖𝑖𝑖𝑖𝑖 + 𝛽𝛽4𝑍𝑍𝑖𝑖𝑖𝑖 + 𝜂𝜂𝑖𝑖𝑖𝑖 + 𝜂𝜂𝑖𝑖𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖
where 

  defines the value added embedded in the exports of country i to country j, which are 

(1) 

𝑉𝑉𝐴𝐴𝑖𝑖𝑖𝑖𝑖𝑖

then processed by j and further re-exported to a third country. The set of ij bilateral determinants 
over time include bilateral tariff rates (
(

) and the depth of a PTA 
  refers to a set of standard gravity variables including the 
𝐹𝐹𝐹𝐹𝐼𝐼𝑖𝑖𝑖𝑖𝑖𝑖

)41  applicable in both countries. 

, bilateral FDI inflows (

presence of a common border between the two countries, common language and distance. We also 
𝑃𝑃𝑃𝑃𝐴𝐴𝑖𝑖𝑖𝑖𝑖𝑖
add origin and destination time-fixed effects (

) to control for all origin and destination-

𝑅𝑅𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑖𝑖𝑖𝑖)
𝑍𝑍𝑖𝑖𝑖𝑖

specific characteristics. The regression is estimated in log levels using the ordinary least squares 
𝜂𝜂𝑖𝑖𝑖𝑖 𝑡𝑡𝑎𝑎𝑠𝑠 𝜂𝜂𝑖𝑖𝑖𝑖
(OLS) estimator and includes intra-national trade flows in order to identify the impact of borders on 
value added trade flows. 

Table A 
Estimated coefficients from panel regression in equation 1 

Value added of i re-exported by j 

FDI outflow (i to j) 

Average tariff rate 

PTA level 

Common border (1=yes, 0=no) 

Common language (1=yes, 0=no) 

Weighted distance (pop-wt, km) 

Observations 

R-squared 

Bilateral gross exports 
(GEX) 

Bilateral traditional trade 
(GEX - GVC fw) 

(1) 

0.091*** 

(0.010) 

-0.058*** 

(0.017) 

0.183*** 

(0.090) 

0.484*** 

(0.081) 

-0.857*** 

(0.031) 

11,691 

0.586 

(2) 

0.094*** 

(0.012) 

0.225** 

(0.106) 

0.121*** 

(0.083) 

0.443*** 

(0.116) 

-0.852*** 

(0.058) 

7,163 

0.359 

(3) 

0.088*** 

(0.010) 

-0.067*** 

(0.017) 

0.177*** 

(0.089) 

0.476*** 

(0.077) 

-0.855*** 

(0.031) 

11,691 

0.598 

(4) 

0.091*** 

(0.012) 

0.196** 

(0.103) 

0.110*** 

(0.083) 

0.450*** 

(0.114) 

-0.859*** 

(0.057) 

7,163 

0.370 

Source: Authors’ calculations. 
Notes: p<0.01 ***; p<0.05 - **; p<0.10 *; standard errors in brackets. The regression is estimated using annual data for a panel of 57 countries over the period 
from 1995 to 2015. Exporter time and importer time (annual) fixed effects are included in the panel regression. A robustness check is performed in the column 
“non-GVC trade (i to j)” by using gross exports from i to j consumed in j, a measure of what is commonly defined “traditional trade”. 

Table A illustrates the results of the analysis. It suggests that FDI inflows, the depth of PTAs 
and standard gravity variables are all positively associated with GVC participation. 
Specifically, an increase of 1% in FDI inflows from i to j is associated with a 0.1 percentage point 
increase in the domestic value added of i flowing to j. The gravity variables are also relevant in this 
regard (with the expected sign), such that while a common border and language enhance bilateral 
GVC linkages, distance discourages them. The coefficient of the bilateral tariff rate variable is also 
statistically significant and comes with the expected sign. Specifically, a 1 percentage point increase 
in the bilateral tariff rate is associated with a 0.04 percentage point decrease in GVC trade. In order 

41    The depth of a PTA concerns the coverage of policy areas in the trade agreement. For the purpose of 
this analysis, only core provisions are taken into account. Core provisions are those that the literature 
identifies as more meaningful from an economic point of view. See the World Bank’s content of deep 
trade agreements. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to draw a comparison of the effects of these variables vis-à-vis traditional trade, in two further 
specifications, we replace the dependent variable with gross exports of i to j that are consumed in j 
(i.e. a proxy for “traditional trade”). Table A shows that despite being significant, FDI and the depth 
of PTAs are less important for traditional trade than GVC trade. This result highlights the key role 
that FDI plays in supply chains characterised by vertical MNEs. In addition, for GVC trade, the 
depth of PTAs in terms of coverage of regulation areas may be a more important feature given the 
direct involvement of firms in partner countries through their subsidiaries. These results are in line 
with the literature, which associate the rise of PTAs with increasing participation in GVCs (Laget et 
al., 2018). 

In the presence of importer and exporter fixed effects, a variety of potentially interesting 
determinants of the origin and destination can no longer be correctly identified in a gravity 
equation. These include variables that affect trade flows occurring between the two countries 
without regard to origin, such as country-level economic characteristics, institutional variables and 
policy variables. Adding country-specific variables to the gravity equation could indeed lead to 
biased standard errors. A potential solution deployed in the literature is to adopt a two-step 
estimator.42  This entails first estimating source and destination country fixed effects 

  and 

  in 

equation 1 and then regressing them on a set of variables specific to country j, akin to our second 
estimated equation (equation 2). Here we take the perspective of importer j and assess the extent 
to which specific economic, policy and institutional characteristics determine its position within the 
GVC. 

𝜂𝜂𝑖𝑖𝑖𝑖

𝜂𝜂𝑖𝑖𝑖𝑖

ηjt = αXj,t + εit
Our choice of the variables of interest 

  is informed by the literature and correlation 

Xj,t

analysis presented in the previous subsection. Specifically, we include economic characteristics 
of the importer such as GDP per capita, the level of GDP, the share of manufacturing value added 
in total GDP and unit labour costs. A second set of variables are of institutional origin and relate to 
the soundness of the rules of law and the business environment. Finally, we include a set of policy 
variables, including taxes on corporate earnings, the size of market capitalisation and a measure of 
expenditure in education and in R&D (which serves as a proxy of technological advancements). 

(2) 

42    See Head and Mayer (2014). 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

34 

 
 
 
 
Table B 
Estimated coefficients from panel regression in equation 2 

Importer (j) fixed effect 

(1) 

(2) 

(3) 

Economic variables 

Manufacturing output (% of GDP) 

GDP per capita 

GDP 

Unit labour cost (index, 1990=100) 

Institutional variables 

Rule of law (index) 

Days to open a business 

Policy variables 

Profit tax (% of GDP) 

Market capitalisation (% of GDP) 

Education (% of GDP spent on education) 

R&D (% of GDP) 

Observations 

R-squared 

0.538*** 

(0.038) 

0.039 

(0.034) 

0.657*** 

(0.011) 

-0.348*** 

(0.044) 

-0.026 

(0.022) 

-0.011 

(0.007) 

-0.032*** 

(0.005) 

0.040*** 

(0.007) 

0.313*** 

(0.044) 

-0.107*** 

(0.022) 

2,069 

0.92 

0.487*** 

(0.048) 

0.109** 

(0.046) 

0.588*** 

(0.016) 

-0.075 

(0.054) 

0.210*** 

(0.029) 

-0.021*** 

(0.008) 

-0.017*** 

(0.006) 

0.019** 

(0.008) 

0.116** 

(0.051) 

-0.039 

(0.026) 

1,615 

0.83 

-0.079* 

(0.043) 

-0.044 

(0.038) 

0.853*** 

(0.011) 

-0.086* 

(0.052) 

0.207*** 

(0.029) 

-0.001 

(0.009) 

0.064*** 

(0.007) 

0.067*** 

(0.009) 

0.064 

(0.053) 

-0.222*** 

(0.027) 

1,615 

0.97 

Source: Authors’ calculations. 
Notes: p<0.01 ***; p<0.05 - **; p<0.10 *; standard errors in brackets. The regression is estimated using annual data for a panel of 57 countries over the period 
1995-2015. In specification 1 and 2, importer (destination) fixed effects from equation 1 (specification 1 and 2 featuring GVC trade) are regressed on a series 
of importer economic, policy and institutional variables. In specification 3, importer (destination) fixed effects from equation 1 (specification 3 and 4 featuring 
traditional trade) are regressed on the importer economic, policy and institutional variables. 

Results from this second step indicate that economic characteristics and, to a lesser extent, 
institutional and policy factors are important determinants of a country’s position within the 
value chain. Table B illustrates this, pointing to a large effect of economic development (proxied by 
GDP) and the degree of industrialisation of the economy (proxied by the share of manufacturing 
value added in GDP). At the same time, and in line with the literature, unit labour costs display a 
negative association with backward participation, suggesting that the higher the cost of labour, the 
lower the attractiveness of a country as a processor of inputs within a GVC. Sound rules of law, 
market capitalisation and education level are also significant determinants of a country’s position 
within a GVC, together with policy variables including profit tax. Spending on R&D, a proxy for 
technological advancements, is negatively associated with backward participation. In specification 
3, we regress the fixed effects estimated in the first step regression featuring traditional trade rather 
than GVC trade on the selected independent variables have in almost all cases a different 
coefficient sign. This highlights the different nature of GVC trade vis-a-vis traditional trade, and how 
the two tend to be shaped by different and often contrasting forces. 

Global value chains: measurement, trends and drivers – Drivers of GVC participation 

35 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4 

The role of GVCs in the international 
transmission of shocks 

Vertical integration comes with significant macroeconomic implications. 
Participation in GVCs has enabled countries to specialise in areas of comparative 
advantage, enhancing productivity growth and supporting wages and incomes. At 
the same time, rising vertical linkages have led to growing interconnectedness. This 
section reviews the role of GVCs in the international transmission of shocks. We 
start by providing a review of the recent literature. We then present model-based and 
empirical-based estimates that illustrate the role played by supply chains in the 
transmission of recent major economic shocks, namely the COVID-19 pandemic, the 
United States-China trade dispute and the recent departure of the United Kingdom 
from the European Union. 

4.1 

Literature review 

Production linkages serve as powerful conductors of shocks across countries. 
The idea of IO linkages as a key channel for the propagation of shocks is not new, 
dating back to Leontief (1936) and Hirschman (1958).43  But it is with the emergence 
of GVCs as new global paradigms of production that the role of intermediates trade 
in the international transmission of shocks has gained prominence. Intermediate 
goods cross a number of borders, acting as conductors of economic disturbances 
across countries that may not trade directly with each other. Because of GVC 
linkages, countries’ imports and exports are sensitive to disturbances that originate 
in third countries. For example, the fact that a significant share of imports are used 
as inputs in the production process and are further re-exported implies that changes 
in demand in third countries represent an important determinant of a country’s 
imports. This stands in contrast with standard trade models, where imports tend to 
be expressed only as a function of domestic demand. Similarly, in traditional trade 
models, a country’s exports tend to be expressed as a function of foreign demand. 
However, the fact that a significant share of exports are used by trading partners in 
production and further re-exported implies that a country’s exports may also be 
sensitive to demand changes in third countries. GVCs are a relevant channel of 

43    More recently though, authors have suggested that supply linkages can also turn isolated idiosyncratic 
disturbances at certain firms or industries into large macroeconomic fluctuations, akin to signal relays. 
Analysis by Atalay et al. (2014), for example, indicates that around two-thirds of the variability in 
aggregate output in the United States reflects sector-specific shocks that spread through IO links. 
According to Carvalho (2014), this occurs whenever the production structure of an economy is 
dominated by a small number of hubs supplying inputs to many different firms or sectors. Hubs shorten 
distances between otherwise disparate parts of the economy that do not directly trade inputs, thus 
acting as powerful conductors of economic disturbances. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

36 

 
 
 
transmission of supply-side shocks44, as evidenced by the recent negative effects of 
COVID-related supply bottlenecks.45 

‐

Eisenlohr, 2020) have documented the sticky nature of 

The role of GVCs in the international transmission of shocks is largely 
associated with their sticky nature. Several authors in the literature (Antràs, 
2020a; Monarch and Schmidt
GVCs. This reflects the irreversible trait of many investments made by firms in the 
set-up and organisation of their GVCs. Highly complex goods that require particular 
production processes or specialised channels may be more difficult to substitute. 
Thus, the failure of any single supplier could affect the entire production chain, 
leading to higher production costs for downstream firms when shifting to an 
alternative supplier, or worse, to a halt in production. Analysis by the IMF finds that 
highly interconnected countries that produce easily substitutable goods are better 
positioned to withstand disruptions in GVCs.46 

The impact of shocks can be magnified through the value chain, as the shock 
ripples through. The basic idea behind this is known as the “bullwhip effect” and 
stems from the fact that, amid a change in demand for goods and services, firms 
also adjust their stock of inventories. In the face of large demand volatility, 
businesses typically face forecast errors, against which they hedge by building 
stocks of inventories. Whenever they are hit by a demand shock, downstream 
suppliers first deplete their inventories, thereby reducing their demand for inputs from 
upstream suppliers. In general, upstream participants in a supply chain face greater 
demand volatility than downstream ones. The result is that shocks to final demand 
are amplified through the value chain. The effect of inventories as an amplification 
device within a GVC has been studied at several levels of aggregation. Di Mauro et 
al. (2012) use firm-level transaction data, while Alessandria et al. (2010) use industry 
data to show that procyclical inventories may have exacerbated the effect of the 
2008 recession. 

The recent literature documents the rising interdependence of business cycles 
in the wake of pervasive supply linkages. De Soyres and Gaillard (2020) argue 
that economic activity across countries becomes more synchronised when the 
content of their trade is tilted towards intermediates as opposed to final goods. Di 
Giovanni and Levchenko (2010) deploy a large cross-country, industry-level panel 
dataset of manufacturing production and trade and show that bilateral international 
trade increases output co-movement significantly more in cross-border industry pairs 
that use each other as intermediate inputs. Specifically, they find that vertical 
production linkages account for some 30% of the total impact of bilateral trade on the 
business cycle correlation. Frohm and Gunnella (2021) provide evidence that, similar 
to a closed economy set, it is not IO linkages per se that generate spillovers across 

44    Boehm et al. (2019) deploy a rich firm-level dataset from the US Census Bureau and study the effects 
of the 2011 Japanese tsunami on US firms. They find that US affiliates of Japanese multinationals 
suffered large drops in output in the months following the tsunami, roughly one-for-one with the fall in 
their imported inputs. These firms also reduced demand for non-Japanese inputs thereafter, with the 
impact of the shock spreading through the US economy. 

45    See Frohm et al. (2021). 
46    See Korniyenko et al. (2017). 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

37 

 
 
 
countries, but rather the presence of large hubs in the global economy that tie 
otherwise unrelated sectors together. 

At the same time, participating in GVCs cushions the reaction of trade prices 
and volumes to exchange rate fluctuations. Intuitively, backward linkages 
attenuate effects on trade elasticities since, for example, the positive 
competitiveness effects of a depreciation are counterbalanced by an adverse effect 
on input costs.47  Similarly, since some of a country’s exports are reimported after 
processing abroad, any competitiveness effect of a depreciation is attenuated as 
goods are reimported. Finally, re-exported products can make exports more 
sensitive to trade partners’ effective exchange rates.48, 49  As a consequence of the 
development of cross-border production chains, exchange rate elasticities have 
decreased over time (Ahmed et al., 2015). 

In the wake of rising participation in GVCs, there is a need to rethink the use of 
conventional trade definitions based on gross trade within macroeconomic 
analysis and forecasting. For example, with the increasing fragmentation of 
production processes, imports are widely used to produce exports, with countries 
often competing against each other at specific stages of the value added chain. This 
presents a challenge to traditional measures of real exchange rates, which assume 
that countries compete to sell products using only domestic inputs. GVCs also imply 
that countries trade intermediate inputs intensively. Consequently, an appreciation 
vis-à-vis a trading partner from which a given country imports intermediate goods 
may be beneficial for the competitiveness of that country as it reduces the cost of 
intermediate goods imports. To account for this effect, input-output real effective 
exchange rates (IOREERs) are widely computed in the literature (Georgiadis et al., 
2020). In addition, in a world characterised by cross-border production chains, export 
market shares computed with gross trade flows may not fully reflect a country’s 
contribution to global production. Production processes are increasingly fragmented, 
and the distinction between production and assembly should be taken into account 
to correct gross exports for the source of value added. 

4.2 

GVCs and the international transmission of shocks: 
recent experiences 

The global economy has been hit by several detrimental shocks in recent 
years. Trade protectionism has increased sharply amid trade tensions between the 
United States and China and the departure of the United Kingdom from the 
European Union. More recently, the COVID-19 pandemic crisis has pushed the 
global economy into a recession of unprecedented severity. These three episodes 
represent natural experiments which can help to shed light on how different shocks 

47    See Amiti et al. (2014) and Georgiadis et al. (2020). 
48    De Soyres et al. (2021) theoretically and empirically show how each way of participating in GVCs 

affects exchange rate pass-through and export elasticity. 

49    To investigate the dampening effect of GVC participation on exchange rate elasticities, a specification 
with GVC interaction effects is generally used in the literature. This approach could be extended to the 
analysis of other relevant shocks to global growth, such as those related to monetary or trade policy. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

38 

 
 
 
propagate through the global supply chain. While they differ deeply in their origin, the 
span of countries affected and their economic severity, all are likely to have 
distressed GVCs. At the same time, value chains have served as vehicles of 
transmission and amplification of the economic effects on global economic and trade 
activity. This subsection assesses the quantitative effects of disruptions in GVCs 
associated with each of these recent events and attempts to quantify the ensuing 
effects on world trade and activity. The analysis relies mostly on model simulations. 
Box 3 presents panel-based estimates of the amplification effects of the COVID-19 
lockdown in China in early 2020 through the GVC. 

4.2.1 

The role of GVCs in the propagation of trade cost shocks 

In a world characterised by extensive supply linkages, the impact of tariffs and 
non-tariff measures cumulates along the chain. Higher trade costs arising from 
import duties and non-tariff-barriers affect economic activity and trade by altering 
both the quantity and price of traded goods. When levied on intermediate inputs, 
tariffs and non-tariff costs are incurred every time these are shipped to another 
country for further processing. This implies that by the time finished goods have 
reached the final consumer, their price may have risen significantly. Moreover, when 
imported intermediate goods are subject to higher tariffs or non-tariff barriers, 
domestic producers in the country imposing them may also suffer. In addition, tariffs 
and non-tariff barriers are typically levied on a good’s gross value of imported goods. 
Therefore, for those exporters for whom foreign inputs account for a large share of 
exports, a low nominal tariff can translate into a high value-added tariff. Compared 
with a situation in which the entire value added of goods is produced domestically, 
tariffs and non-tariff barriers may have a proportionally larger impact on the profits of 
exporting firms, thereby increasing the incentive to pass the higher costs on through 
the value chain. Third countries involved in intermediate stages of production may 
also face higher production costs. In this subsection we investigate the role of GVC 
linkages in propagating the effects of two recent episodes of increases in trade 
costs: the United States-China trade dispute and Brexit. 

Tariffs have increased sharply on the back of United States-China trade 
tensions. The risk of a trade dispute between the United States and China became 
the focus of attention in 2018 and almost materialised in 2019 as trade tensions 
between the two countries sharply escalated. The phase one deal signed between 
the two countries in December 2019 led to a cooling off of tensions. The additional 
US tariffs that were expected to be imposed on China in December 2019 were 
cancelled as part of the deal, as well as the ensuing Chinese retaliatory tariffs. Tariffs 
on USD 250 billion worth of Chinese exports were maintained, however, as a result 
of which US tariffs returned to their pre-1975 levels (see Chart 13).50  The confirmed 
US tariffs affect parts, components and other intermediate products to a large extent. 
Internal ECB estimates indicate that intermediate goods form around 35% of the 
goods affected. In this regard, value chains could represent an important vehicle of 

50    As part of the deal, China also committed to purchase an extra USD 200 billion worth of imports from 

the United States by the end of 2021. Analysis by the Peterson Institute for International Economics 
indicates that this target is unlikely to be reached. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

39 

 
 
 
transmission of their impact. Existing studies concur that the direct effect of the tariffs 
implemented in the period 2018-19 is likely to remain relatively contained (Gunnella 
and Quaglietti, 2019). Still, model-based simulations indicate that in the event of a 
re-escalation, the effects could turn out to be sizeable, compounded by heightened 
financial stress and a weakening of confidence. 

Chart 13 
US tariff rates 

(percentages) 

All products
Consumption products
Tariffs in effect

30

25

20

15

10

5

0
1900

1915

1930

1945

1960

1975

1990

2005

Sources: USITC, World Bank, Haver, Citi Research and authors’ calculations. 

The departure of the United Kingdom from the European Union is likely to 
result in higher non-tariff barriers between the two blocs. On 24 December 
2020, after long negotiations, the European Union and the United Kingdom reached 
a UK-EU Trade and Cooperation Agreement, which regulates the post-Brexit trade 
relations between the two (among other things). The deal provides for zero-tariff, 
zero-quota goods trade between the United Kingdom and the European Union. It 
also covers matters such as data, energy, transport, movement of people, law and 
justice, fisheries and UK access to EU programmes. Although there will not be any 
tariffs levied or restrictive quotas imposed, many goods traded between the United 
Kingdom and the European Union now face new customs and regulatory checks, 
including rules of origin and stringent local content requirements.51  The increased 
red tape means that businesses face additional costs compared with continued 
membership of the Single Market and customs union. 

Model-based analysis points to the important role of GVCs in amplifying the 
effect of tariffs implemented by the US and Chinese administrations and the 
trade effects of Brexit. In order to assess the effects of the tariffs implemented in 
the context of the United States-China trade dispute and of higher non-tariff barriers 
resulting from Brexit, we deploy a multi-country, multi-sector general equilibrium 
trade model of the global economy with trade in both final and intermediate 

51    Specific annexes were agreed upon to reduce the non-tariff barriers for medical products, automotive 

products, chemical products, organic products and wine. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

40 

 
 
 
 
products.52  The model also allows for the simulation of the welfare effects of a free 
trade agreement akin to the one signed between the United Kingdom and the 
European Union.53  It is important to stress that being a steady state counterfactual 
exercise, the results refer to long-term effects when all adjustments take place. Chart 
14 compares two sets of losses derived from the multi-sector model in the context of 
the United States-China trade dispute and the departure of the United Kingdom from 
the European Union: (a) those obtained from the actual structure of IO linkages, and 
(b) those obtained in a counterfactual scenario where GVC linkages are severed.54 
Results confirm that the organisation of production in supply chains plays an 
important role in transmitting tariff effects, with the impact of the shocks on welfare 
amplified by more than 70% in the case of the United States and by almost three 
times in the case of China. Although the impact on other countries is assessed to 
remain contained, and some countries would benefit from trade diversion (e.g. the 
euro area), GVCs still act as an amplifier at global level. The impact of the Brexit 
shock on welfare is estimated to be -2.1% for the United Kingdom and -0.4% for the 
European Union. 

Chart 14 
Amplification effects of trade cost shocks via GVCs 

(percentage changes) 

Welfare
Exports (right-hand scale)
Imports (right-hand scale)

Welfare – model without GVCs
Exports – model without GVCs (right hand scale)
Imports – model without GVCs (right hand scale)

a) US-China tariffs

b) Brexit

0.05

0.00

-0.05

-0.10

-0.15

-0.20

-0.25

-0.30

1

0

-1

-2

-3

-4

-5

-6

-0.2

-0.7

-1.2

-1.7

-2.2

0

-2

-4

-6

-8

-10

-12

-14

US

CN

EA

World

UK

EU27

World

Sources: World Input-Output Database 2016, WTO Integrated Database, ITC Market Access Map, Comtrade, Felbermayr et al. (2017) 
and authors’ calculations. 
Notes: For the euro area, the weighted average of Member States is reported. Welfare is measured as real household income. 
Product-level tariffs have been aggregated to the ISIC Rev. 4 sectoral breakdown. The dots show the effects without GVC-related 
trade. Panel a: effects from a scenario in which tariffs between the United States and China increase according to the officially 
published lists. Panel b: effects from a free trade agreement between the United Kingdom and the rest of the European Union. See 
Cappariello et al. (2020) for further details. 

52    By mapping bilateral supply chain linkages and value added flows, the model provides a rich 

framework that captures countries’ heterogeneity in terms of the composition of their trade flows as well 
as in terms of their involvement in GVCs. 

53    Sectoral bilateral NTBs have been estimated as an average effect from a theoretically consistent 

gravity equation. Specifically, NTBs are estimated as the difference between the coefficient of an EU 
dummy and an FTA dummy coefficient. This is because bilateral trade flows would incur the cost of not 
being in the EU but benefit from the effects of an FTA. See Cappariello et al. (2020). 

54    Specifically, in the counterfactual scenario without GVCs, all bilateral trade flows in intermediate 

products are set to zero and the corresponding amounts are allocated to final products. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

41 

 
 
 
 
 
 
Analysis also points to a significant deterioration in GVC ties between the 
United Kingdom and the European Union in the long term. The model can also 
help to shed light on the consequences for direct (i.e. value added in final and 
intermediate products that are not re-exported) as opposed to GVC-related trade 
flows (i.e. value added in trade flows that are re-exported) as a share of total 
countries’ exports.55  First, simulation results show that the decrease in both types of 
bilateral flows is more pronounced for the rest of the European Union (EU 27), 
reflecting both a greater decrease in activity and demand in the United Kingdom and 
higher substitutability of the United Kingdom as a trading partner (see Chart 15). 
Second, the role of the United Kingdom in EU production networks will change 
substantially: the share of exports from the EU 27 reprocessed in the United 
Kingdom for further re-exports to other European countries will decrease by 46%.56 

Chart 15 
Effects of Brexit on bilateral trade between EU 27 and the United Kingdom 

(percentage changes in share of total exports) 

Direct exports
Exports through partner to the RoW
Exports through partner to EU countries

0

-5

-10

-15

-20

-25

-30

-35

-40

-45

-50

EU27

UK

Sources: World Input-Output Database 2016, WTO Integrated Database, ITC Market Access Map, Comtrade, Felbermayr et al. (2017) 
and authors’ calculations. 

4.2.2 

The role of GVCs in the propagation of demand and supply shocks 
during the COVID-19 pandemic 

The COVID-19 pandemic unfolded as a combination of supply and demand 
shocks rippling through the global economy in overlapping waves. COVID-19 
hit major GVC hubs sequentially, such that supply chain contagion spread across 
different networks and in reverse. The first effect of the pandemic was a production 
shutdown in China, followed by a collapse in domestic demand. As the virus spread, 
the same shocks hit other Asian countries, leading to supply shortages of inputs from 
Asia across the globe. As Chinese companies started to reopen, production 
shutdowns occurred elsewhere in the world, namely across Europe, the United 

55    In this sense, the reported figures are interpreted as changes in market shares of the trading partner in 

the specific component. 

56    It is important to note that the figures are in value added terms and exclude double-counting arising 

from back-and-forth trade between the United Kingdom and the rest of the European Union. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

42 

 
 
 
 
States and the Middle East. As in Asia, the initial supply shock was followed by a 
demand shock triggered by local quarantine measures and rising unemployment. 
The supply-side shock which first originated in China subsequently worked its way 
back via China’s dependence on other countries’ inputs. Strains have intensified in 
2021, reflecting COVID-19 flare-ups in the East Asia and Pacific region, and have 
led to new closures of factories and ports, but also shocks related to weather 
disruptions and container scarcity.57  The existing literature has not yet reached a 
consensus on the relative contribution of demand and supply shocks to the 
pandemic crisis.58  However, recent analysis by Bobasu et al. (2021) indicates that in 
advanced economies, demand effects dominated in the second quarter of 2020, but 
with supply effects remaining notable (Chart 16). 

Chart 16 
Historical decomposition of GDP and consumer price inflation (CPI) 

(USD billions) 

Total
Demand
Supply
Others

a) GDP

8

4

0

-4

-8

-12

-16

b) CPI

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Q2 2020

Q3 2020

Q2 2020

Q3 2020

Source: Bobasu et al. (2021). 
Notes: Weighted averages of estimated contributions for the United States, the United Kingdom and Japan. Weights are GDP weights 
in purchasing power parity. “Others” refers to monetary policy and oil shocks. The structural vector autoregressive model comprises oil 
prices, GDP, inflation and shadow interest rates. A standard set of sign restrictions are used: a demand shock moves prices and 
output in the same direction, while a supply shock moves them in opposing directions. The oil supply shock increases inflation and 
decreases GDP, but does not react to domestic interest shocks. A tightening of monetary policy lowers both GDP and prices. The 
ECB’s BEAR toolbox Version 4.2 was used. 

Demand and supply shocks generate different dynamics through the supply 
chain. Due to the supply linkages, demand can be passed upstream through the 
production chain to input suppliers. Supply disruptions can be instead transmitted 
down the value chain, with the impact of the shock affecting the production of trade 
partners positioned downstream in the production network. Acemoglu et al. (2012) 
argue that in a competitive set-up characterised by a Cobb-Douglas production 
function, firms in a given industry hit by a shock will produce fewer goods, and the 
price of their goods will rise. Due to the Cobb-Douglas structure, these effects cancel 
each other out for upstream firms, leaving them unaffected, while downstream firms 

57    See Frohm et al. (2021). 
58    Some papers find that aggregate demand shocks dominated in the first quarter of 2020, whereas 
aggregate supply shocks prevailed in the second quarter of 2020 (see Bekaert et al., 2020). By 
contrast, other analysis (see Baqaee and Farhi, 2020) used a sectoral model to demonstrate that both 
stagflationary sectoral supply shocks and deflationary demand shocks are needed to explain the large 
fall in output and moderate inflation response observed in the United States during the initial lockdown. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

43 

 
 
 
 
feel the increase in prices and consequently lower their overall production. 
Conversely, if demand in a certain industry increases, firms in that industry increase 
production, necessitating a corresponding increase in input production by upstream 
firms. Because of constant returns to scale, however, the increased demand does 
not affect prices, and so downstream firms are not affected.59 

Chart 17 
Changes in world value added by sector (H1 2020 versus H2 2019) 

(percentage changes) 

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-10

-15

-20

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We produce a first-order approximation of how sectoral demand shocks 
associated with the outbreak might have propagated through the GVC. In the 
first half of 2020, output contracted in almost every sector of the global economy, 
albeit to differing degrees (Chart 17). Utilities, food production and real estate were 
among the least affected; in general, the greater a sector’s reliance on close physical 
personal contact, the larger was its fall (e.g. tourism and transport, arts, 
entertainment and hospitality). In order to produce an approximation of how sectoral 
output losses might have been transmitted through GVCs, we simultaneously trace 
these through the global production structure using IO data. In a first step, we 
compute partial elasticities which for each country and sector translate domestic and 
foreign demand shocks into proportional changes in output, imports and exports of 
final and intermediate goods to and from all countries and sectors (IO multipliers).60 
We then compute two sets of losses associated with the pandemic: (a) those that 
originate via trade in final goods, and (b) “indirect” losses generated via the global 
supply chain, which originate from changes in (domestic and foreign) demand in third 
countries and translate into lower imports and exports of intermediate goods 
involving at least two border crossings. This second channel allows us to compute 

59    Acemoglu et al. (2016) provide quantitative estimates of the propagation effects of supply and demand 

shocks using US IO tables. 

60    Specifically, we develop expressions for each country’s production, exports and imports as weighted 
averages of sector and country-specific demand changes. The weighting of individual elements of 
demand changes depends on both intermediate and final goods linkages across sectors and countries. 
Because each variable – production, exports or imports – has a unique set of weightings, each 
responds differently to a given vector of demand changes. For further information on the methodology, 
see Bems et al. (2010). 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

44 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
the amplification effect of the pandemic through the GVCs on a given country’s 
imports and exports. 

Our simulations suggest that spillovers through the GVCs are likely to have 
been sizeable for many countries, amplifying the fall in world trade associated 
with the COVID-19 pandemic. Chart 18 shows estimates of the potential 
amplification effect stemming from GVC trade on country imports, exports and 
activity on the back of the pandemic. Shortfalls generated through supply chain 
linkages are presented as percentages of the losses estimated to occur via trade in 
final goods. Our analysis suggests that on the back of sectoral output losses, GVC-
related spillovers are likely to have magnified the decline in imports and exports by 
some 25% for the world economy. The impact is also sizeable at country level, with 
imports falling severely in most countries. 

Chart 18 
COVID-19 shock: shortfalls generated through GVC spillovers 

(percentage changes) 

Exports
Imports

0

-10

-20

-30

-40

-50

United States

China

United Kingdom

Japan

Mexico

Euro area

World

Sources: OECD and authors’ calculations. 
Notes: The chart shows the additional shortfalls that could be generated for each country through GVC-related spillovers. GVC 
shortfall is expressed as a percentage of losses estimated to occur through traditional trade (e.g. imports and exports of final goods 
and intermediates used in production for domestic absorption). GDP losses are derived from losses on imports and exports shown in 
the chart. 

Countries positioned upstream in GVCs are likely to have been particularly 
affected. Chart 19 shows estimated declines in GVC exports according to the 
position that each country has within the GVC. Specifically, for each country we 
relate the additional losses that could be realised through GVC linkages on the back 
of the pandemic to their relative upstream position in the supply chain. The latter is 
computed for each country as the average number of intermediate production stages 
between production and final consumption. Specifically, we assign the value 1 to the 
share of output sold directly to final consumers, value 2 to the share sold to final 
consumers after being used by another industry/country, and so on.61  To obtain a 
value for each country, we calculate the average across sectors. The chart shows 
that exports of those countries located upstream in the supply chain may have been 
affected particularly severely. In our static exercise, this relates to the fact that the 

61    For further information on the methodology, see Antràs et al. (2012). 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

45 

 
 
 
 
more upstream a country is in a value chain, the larger its share of exports of 
intermediate goods will be. 

Empirical analysis corroborates our simulations, suggesting that upstream 
suppliers may have been hit harder as a consequence of the decline in 
demand following the lockdowns in China in early 2020. For the purpose of our 
analysis, we used a panel model to test which sectors and countries in the Chinese 
value chain were hit hardest on the back of the lockdown implemented by China in 
January and February 2020. The analysis indicates that all countries and industries 
positioned upstream in the Chinese value chain were the heaviest affected, in line 
with our regression-based estimates. This stems from the fact that as costs 
accumulated and were amplified through the value chain, partners positioned high 
up in the Chinese value chain suffered the highest costs (for details on the 
methodology used for this analysis, see Box 4). 

Chart 19 
Contributions to export shortfalls and upstream country position in GVCs 

(percentage) 

n
o
i
t
i
s
o
p
m
a
e
r
t
s
p
u
C
V
G

)
s
t
r
o
p
x
e

s
s
o
r
g
f
o
e
g
a
t
n
e
c
r
e
p
(

-60

BRN

SAU

ROW

JPN

DEU

USA

CHN

LUX

-50
-20
GVC export losses (percentage of traditional trade losses)

-40

-30

40

30

20

10

0

-10

Sources: OECD and authors’ calculations. 
Notes: The bubble size represents the contribution of the change in GVC exports in a given country to the change in world GVC 
exports. GVC upstream position is calculated as domestic value added that is further re-exported by trading partners as share of total 
exports. GVC shortfall is expressed as a percentage of losses estimated to occur through traditional trade (e.g. imports and exports of 
final goods and intermediates used in production for domestic absorption). 

Box 4 
The impact of the COVID-19 shock in China on GVCs 

In this box, we focus on the COVID-19-related lockdowns and associated demand shock in 
China and test whether sectors and countries that are upstream to China in the value chain 
were particularly affected, in line with the findings of our model simulation presented in the 
main text. We employ a monthly panel model featuring 37 countries and 22 industries between 
January 2017 and February 2020. For each industry and country, we regress annual percentage 
changes in total exports of intermediate goods on an interaction variable. In the latter, we combine a 
dummy variable that takes the value of one in February 2020 (i.e. a proxy for the COVID-19 shock) 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

46 

 
 
 
 
 
 
 
 
 
 
with a measure of upstreamness to China computed for each individual country-industry pair.62  Our 
measure of upstreamness is obtained by measuring the number of intermediate production stages 
for each country-industry pair’s exports before being consumed in China.63 

The results suggest that China’s upstream suppliers may have been hit harder as a result of 
the decline in Chinese demand. Table A provides evidence of amplification effects stemming from 
the demand shock hitting China through the value chain. Specifically, our results suggest that 
country-industry pairs positioned upstream in the Chinese value chain were hit the hardest, with 
exports falling on average by 3.8% more compared to more downstream trade partners. While the 
results should be interpreted with a degree of caution due to the limited period of time available to 
observe the postulated effect, they overall confirm the presence of amplification (i.e. the bullwhip 
effect) through GVCs. In addition, results by region suggest that the decline in Chinese demand 
was borne mostly by China’s trading partners in the Asian value chain. 

Table A 
Estimated coefficients from panel regression 

Dependent variable: total country export growth of 
intermediates 

Index of upstreamness to China 

i 

Overall 

ii 

iii 

iv 

By region 

Weighted 

Asia 

NAFTA 

Europe 

0.004 

(0.004) 

0.021** 

(0.010) 

COVID-19 dummy x index of upstreamness to China 

-0.038*** 

-0.055*** 

Lag 1 

Lag 2 

Lag 3 

Intercept 

Observations 

R2 

(0.008) 

0.368*** 

(0.007) 

0.141*** 

(0.008) 

0.015** 

(0.007) 

-0.020 

(0.012) 

16,607 

0.390 

(0.018) 

0.404*** 

(0.014) 

0.110*** 

(0.016) 

0.066*** 

(0.013) 

-0.073** 

(0.031) 

4,154 

0.494 

0.002 

(0.012) 

-0.019 

(0.014) 

0.418*** 

(0.026) 

0.197*** 

(0.028) 

0.009 

(0.026) 

-0.008 

(0.039) 

1,452 

0.594 

-0.029** 

(0.012) 

0.001 

(0.015) 

0.361*** 

(0.013) 

0.148*** 

(0.015) 

-0.147*** 

(0.013) 

0.083** 

(0.040) 

4,553 

0.398 

Source: ECB calculations.   
Notes: p<0.01 ***; p<0.05 - **; p<0.10 *; standard errors in brackets. The regression is estimated using the one-year lagged level of total intermediate exports 
as an analytical weighting for the observations. Country, industry and time (monthly) fixed effects are included in the panel regression. We also performed 
robustness tests by moving the COVID-19 dummy to one year before (February 2019) and observing an insignificant coefficient for the interaction term. 

62    See also Ferrari (2019). 
63    Distance from China is measured as the average number of times a good is used as an input by other 

industries (either in the same country or not) before being absorbed in China. 

Global value chains: measurement, trends and drivers – The role of GVCs in the 
international transmission of shocks 

47 

 
 
 
 
 
 
 
 
 
 
5 

Discussion: the future of GVCs 

GVCs are undergoing a rapid transformation. Participation in GVCs enables 
countries to specialise in areas of comparative advantage, enhancing productivity 
growth and supporting wages and incomes.64  However, after three decades of 
continued growth, GVC participation is on the decline. To some extent, this reflects 
to compositional effects triggered by the fact that sectors with a low GVC intensity 
have accounted for an incrementally large share of world trade since the global 
financial crisis. Nevertheless, GVCs remain highly complex and maintain a strong 
regional dimension, especially within Europe and Asia. 

There are a number of drivers behind the slowdown in GVC participation. 
Forces that contributed to the early rise have stalled or reversed over the past 
decade, contributing to a slower pace of GVC participation globally. Trade costs, 
including transport costs and tariff and non-tariff barriers, have been on the rise since 
the global financial crisis, making it more costly for firms to offshore production 
across different jurisdictions. Several emerging market economies in Asia have been 
gradually turning inward, reducing their reliance on imported inputs. Most of these 
factors represent structural shifts and may continue to unfold in the coming years, 
reshaping the future path of GVCs and of world trade in general. The diffusion of 
new technologies related to Industry 4.0 is also likely to affect GVCs. However, 
evidence on their impact remains scant, and the studies that are available have not 
reached conclusive findings. 

GVCs are complex and extensive networks, and a breakdown in one part of the 
chain may quickly have detrimental global effects. As documented in this paper, 
supply chains are highly vulnerable to global risks. GVCs have also played an 
important role in the transmission of recent major events such as the COVID-19 
pandemic, in which GVC-related spillovers are likely to have magnified the decline in 
global trade by some 25%. GVCs were hit hard in the first few months of 2020, 
including on the back of lockdowns in China, but intermediate goods trade recovered 
relatively quickly in the second half of the year, with GVCs showing some degree of 
resilience. 

Risk mitigation concerns related to the COVID-19 pandemic have sparked 
debates about the reshoring of production. The COVID-19 pandemic has led to 
supply chain disruptions at several points, including those related to plants and 
shipping halts during the heights of the pandemic, supply bottlenecks in the logistics 
sectors during the recovery phase and the shortage of specific components 
(medical-related initially, intermediate inputs in the recovery phase) in the course of 
2021. On the one hand, complex and geographically sparse supply chains have 

64    A number of recent studies attempt to quantify the effects of GVC participation on economic growth. 
Kummritz et al. (2017) find that GVC integration generally increases an industry’s value added, 
especially when participating in upstream stages. They additionally highlight the importance of country-
specific characteristics and policy for benefitting from trade integration. Constantinescu et al. (2019) 
find that participation in GVCs is a significant driver of labour productivity. An assessment of the 
benefits of engaging in global value chains in terms of economic growth and productivity is outside the 
scope of this paper. 

Global value chains: measurement, trends and drivers – Discussion: the future of GVCs 

48 

 
 
 
been key in buffering domestic shocks (Espitia et al., 2021). At the same time, GVCs 
have served as conductors of foreign shocks and amplified their effects, including in 
recent catastrophic events (see Section 4.2.2). The complexity of companies’ input 
sourcing structures has recently been viewed as a vulnerability, to the extent that 
some companies are revising their inventory models and governments are 
discussing initiatives to reshore stages of production domestically.65  A debate has 
emerged over how to improve GVCs’ resilience while still capturing efficiency gains 
stemming from specialisation and comparative advantages. Some claim that more 
localised production would provide greater security of supply and lower uncertainty 
for consumers and businesses, thus calling for the reshoring of GVCs. Others 
advocate the opposite, arguing that reshoring also means greater reliance on own 
production, which limits the scope for cushioning shocks, particularly those that may 
originate domestically. The World Bank and OECD (2021) indicate that GVCs play 
an important role in cushioning economic shocks, hence warning against policies 
aimed at reshoring. At the same time, supply chains characterised by low diversity of 
suppliers or buyers can increase the probability of disruption and magnify the 
propagation of shocks. 

The pandemic has the potential to catalyse supply chain changes that were 
already underway, thereby enhancing resilience, including through the more 
extensive adaptation of digitalisation and more sustainable production 
networks and practices. Results from a survey carried out by the World Bank66  on 
78 affiliates of MNEs operating in 36 developing countries indicate that in order to 
increase supply chain resilience, about 60% of the surveyed MNEs have turned to 
digital technologies in search of optimising capacity and improving logistics. Around 
a third reported mapping the tiers of their supply chains to improve visibility of 
potential vulnerabilities. Some are diversifying suppliers (37%) and production sites 
(18%), and only a small number of firms are shifting production closer to consumers 
by nearshoring or reshoring (14%). A potential further effect associated with the 
pandemic is a change in the distribution of (perceived) uncertainty among economic 
agents. COVID-19 not only highlights that pandemics are likely to be particularly 
disruptive in a globalised world but has also drawn new attention to other types of 
shocks associated with, for example, climate change. The need to cushion risks and 
enhance resilience could prompt firms to reduce reliance on just-in-time supply 
chains. Recent research from Capgemini67  suggests that the proportion of firms 
focusing on just-in-time sourcing and manufacturing is expected to decline in the 
next three years. 

65    See World Bank and OECD (2021) and Lund et al. (2020). 
66    See Saurav et al. (2020). 
67    See Capgemini (2020), Fast Forward: Rethinking supply chain resilience for a post-COVID-19 world. 

Global value chains: measurement, trends and drivers – Discussion: the future of GVCs 

49 

 
 
 
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Acknowledgements 
With thanks to Rinalds Gerinovics for excellent research assistance, and Maria Grazia Attinasi, Erik Frohm, Pavlos Karadeloglou, 
Stelios Makrydakis and Livio Stracca for useful comments and suggestions. 

Simone Cigna 
Pompeu Fabra University, Barcelona, Spain; email: simone.cigna@bse.eu 

Vanessa Gunnella 
European Central Bank, Frankfurt am Main, Germany; email: Vanessa.Gunnella@ecb.europa.eu 

Lucia Quaglietti 
World Bank, Washington, D.C., United States; email: lquaglietti@worldbank.org 

© European Central Bank, 2022 

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