### **2.2.2 Censoring and Endogeneity Concerns**

The censoring concerns in this specification mirror those outlined in Section 2.1.2, and so we implement the same Tobit correction. In contrast, new endogeneity concerns arise in this empirical specification. In addition to domestic value added, the levels of domestic production, imports, and foreign value added may be correlated with the residual variation in tariffs. Most importantly, foreign value added may increase with tariffs. In our model, the price of foreign value-added inputs rises mechanically with the tariff. Outside the model, one might (also) be concerned that foreign firms engage in “tariff jumping,” shifting to local final production (using imported inputs) in high tariff sectors/countries.<sup>34</sup> If so, the coefficient estimate on the FVA-Ratio will be biased upwards, which could lead us to find a zero/positive coefficient erroneously. We discuss this issue further below.

# **3 Data**

This section describes how we construct our data on the value-added content of production and bilateral trade policy. It also offers a first peek at the data.

## **3.1 Value-Added Content of Final Goods Production**

To calculate our measures of the value-added content embodied in final goods production (DVA and FVA), we use data from the World Input-Output Database (WIOD).<sup>35</sup> It contains an annual sequence of global input-output tables for the 1995-2009 period covering 35 industries across 27 EU countries and 13 other major countries.

Following Los, Timmer and de Vries (2015), we use these data to compute the national origin of value added contained in the final goods that each country produces. Intuitively, the global input-output table enables one to trace backwards through the production process to assess the value and identify the national origin of the intermediate inputs used (both directly and indirectly) to produce each country’s final goods. With this information, one can (for example) compute the amount of Canadian value added embodied in US-produced autos. We describe the exact calculations in Appendix B. We construct value-added contents

> 34Alternatively, by protecting domestic producers and raising the level of domestic production, high tariffs could mechanically raise the total amount of foreign value added used by domestic industry. This is not a concern with the log specification we implement, since ln � _FV A_<sup>_i_</sup> _xt_<sup>_/IM_</sup> _xjt_<sup>_i_</sup> � is purged of ln � _FG_<sup>_i_</sup> _xt_<sup>_/IM i_</sup> _xjt_ �. To be explict, let us write _FV A_<sup>_i_</sup> _xt_<sup>=</sup><sup>_fvai_</sup> _xt_<sup>_FGi_</sup> _xt_<sup>,where</sup><sup>_fvai_</sup> _xt_<sup>istheshareofforeignvalueaddedindomestic</sup> production. Then, ln( _FV A_<sup>_i_</sup> _xt_<sup>_/IM_</sup> _xjt_<sup>_i_) = ln(</sup><sup>_fva_</sup> _xt_<sup>_i_) + ln(</sup><sup>_FGi_</sup> _xt_<sup>_/IM i_</sup> _xjt_<sup>).Sincewecontrolforln(</sup><sup>_FGi_</sup> _xt_<sup>_/IM i_</sup> _xjt_<sup>)</sup> directly, the FVA effect is identified entirely off variation in the share of foreign value added (ln( _fva_<sup>_i_</sup> _xt_<sup>)) over</sup> time. Tariff jumping could, however, influence this share.

> 35The data is available at `http://www.wiod.org` and documented in Timmer (2012).

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