of GVCs. Yet, even when sticking to the view of GVCs as mere engines of hyper-specialization, multi-stage production processes with significant complementarities across production stages will tend to be particularly sensitive to contractual institutions (see Acemoglu et al., 2007). In plain words, the performance of a global value chain is often severely impacted by the strength of its weakest link, and thus production delays or mishaps driven by weak contract enforcement might be particularly harmful in GVCs. In sum, the quality of a country’s institutions and its political stability are expected to be important determinants of GVC participation and might affect GVC trade disproportionately more than traditional trade. Chapter 2 of the 2020 World Development Report finds support for this hypothesis.

Empirical work in international trade emphasizes that trade costs have a significant negative effect on trade flows. There are various possible sources of trade costs, ranging from geographical features (such as remoteness), ineffi cient infrastructure, regulatory barriers (e.g., tariffs and quotas), or delays in clearing customs. There are at least two reasons to believe that trade costs might have a disproportionately negative effect on the GVC component of trade flows. First, the “weakest-link” mechanism invoked in the previous paragraph applies also to production delays associated with impediments to trade (such as customs delays). Second, and relative to traditional trade, higher trade costs not only increase the prices at which imported goods are consumed, as in traditional trade, but they also increase the cost of imported intermediate inputs, which get passed down the value chain and translate into higher costs associated with a country’s exports, thereby further depressing GVC participation.

Regional trade agreements, or trade agreements more broadly, are a particularly effective mechanism to reduce trade barriers between the signing countries. Consequently, one would expect that GVCs are particularly active among countries that have signed regional trade agreements. Indeed, GVC activity is particularly intense among EU and ASEAN members, but it should be noted that other regional trade agreements, such as Mercosur, appear to have been much less successful in generating GVC participation among its members.

Trade costs not only affect the overall GVC participation of countries, but they might have a significant effect in the positioning of countries in GVCs. In sequential (or snake-like) GVCs, trade costs compound along the value chain and have a higher incidence on downstream stages than on upstream stages. As Antràs and de Gortari (2019) demonstrate, this leads remote countries to specialize in upstream stages, and more central countries to specialize in more downstream stages. An implication of this fact is that we might expect the effect of trade costs to be more significant for backward GVC participation indices than for forward GVC participation indices.

Empirical work in international trade also emphasizes the role of market size in shaping bilateral trade flows. Larger economies are expected to export more (since they produce more), and they are also expected to import more (since their income is larger). An often-underappreciated aspect of the gravity model of trade, the most successful empirical model of bilateral trade flows, is that it provides a straightforward explanation for why the ratio of trade to output tends to be smaller 10