While the CGE results presented here are conservative estimates, their magnitude is aligned with other recent reform simulations estimated for Brazil. While the model is dynamic in the sense that capital stock can change over time, it does not include other dynamic factors such as productivity increases from endogenous growth effects via technological spillovers, “learning by doing,” and inflows of foreign technology and efficiency-seeking FDI induced by liberalization. Nevertheless, the magnitude of the results is aligned with recent empirical evidence on the potential benefits from furthering trade liberalization on Brazil. For instance, results from IMF (2017) suggest that halving tariffs on capital goods in Brazil would increase the investment-toGDP ratio by about two percentage points. Araujo and Flaig (2016) use a CGE model and show that if Brazil reduces its import tariffs to OECD minimum level, eliminates all local content requirements and reduces export tariffs to zero, aggregate output would grow by 1.7 percent.

At the firm level, higher participation in GVCs is expected to bring productivity dividends to firms. The literature on productivity effects from GVC participation points to three main transmission channels. First, through specialization in tasks. Growth of GVCs has led to increasing specialization in specific activities within value chains. Firms then can reap productivity gains by specializing in those core tasks for which they are most efficient and offshoring less efficient parts of the production process abroad (Grossman and Rossi-Hansberg, 2008). Second, through access to a larger variety and quality of intermediate inputs; as previously highlighted, there is vast empirical evidence in the literature showing the effects of importing inputs in productivity growth (see Halpern, Koren and Szeidl (2015), for instance). Third, through knowledge spillovers from multinational enterprises. To the extent that these firms tend to demand more and/or better-quality inputs from local suppliers and may also share knowledge-technology and encourage the adoption of new practices, sales of GVC-linked local intermediates to international buyers is expected to spur productivity by increasing demand for more and/or better inputs and by providing assistance to local suppliers (Taglioni and Winkler, 2016).<sup>24</sup> The existence of productivity spillovers from structural integration in GVCs for Brazilian manufacturing firms is confirmed by recent empirical analysis. Using a cross-section of around 12,700 domestic manufacturing firms in 22 low- and middle-income countries from the World Bank’s Enterprise Surveys, Winkler (2017) explores the association between GVC integration and labor productivity for Brazil and the full sample (see Annex 1 for a brief methodological presentation). Results suggest that Brazilian manufacturing firms operating in industries with a high structural integration into GVCs, namely which equals or exceeds the 75th percentile across all 22 countries in the sample for that industry, show significantly higher labor productivity levels than those firms that operate in industries with lower GVC integration. Their difference in productivity is stronger for GVC integration as a seller (+11.2 percent on average) compared to GVC integration as a buyer (+8.5 percent on average) in the Brazil sample, holding all other variables constant. By comparison, the findings suggest that GVC integration as a seller at the industry level is correlated with a smaller labor productivity surplus (+3.8 percent on average) in the sample of 22 countries and is non-existent for high GVC integration as a buyer.

> 24 It is worth stressing however that the knowledge spillovers from international buyers and FDI in general tend to accrue asymmetrically, benefitting firms with sufficient absorptive capacity. In this regard, the capacity of a country or a firm to absorb, adapt, and reap the full benefits of knowledge produced at the frontier depends on strategic investments in R&D, organizational know-how, and other forms of knowledge-based capital. (OECD, 2015) provides a theoretical and empirical discussion on the role of technology diffusion as a channel to boost productivity growth.

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