1. Background

is important for both ECA and Middle-East North-Africa (MENA), while South Asia (SAR) excels in transport and storage services.

To move over gross trade figures, the second step consists in presenting the trade in value-added data to study production linkages. Value chains are the process of adding value to a product from its conception to its final consumption passing through design, production, transport, distribution and retail.<sup>3</sup> Nowadays, the life cycle of a product is no longer confined to a single firm. Firms specialize in business functions and take on different tasks that allow to serve the final consumer. Through the process of value addition, all factors that contributed to production, foreign and domestic, get remunerated .

In recent years, because of the decrease in transport and communication costs, value-chains have unbundled, and they are no longer tied to one specific geographical location. Firms use and supply both foreign and domestic contractors for a variety of business functions. In doing so, the firm at the top of the chain eventually exports a final good or service and is double counting all intermediate steps in the gross exports figures. National statistics do not cover these flows at the firm level, which poses a challenge for measuring Global Value Chains (GVCs).

Input-output tables allow for an accounting of sources of value-added by effectively slicing the valuechain. The sources involve revenues to labor, capital but also upstream sectors. In addition, they allow for a regional separation of value-added by geographical origin of imports. While input-output tables do not record specifically firms’ transactions, they measure intra- and inter-industry flows between countries. By slicing the value chain, input-output tables allow us to determine the amount of double counting derived from goods crossing the border several times.

In this study, we use the multi-regional input-output tables from the TiVA database to identify the existing value-added networks in the B&R Economies. The database records exports of intermediate and final goods across industries and countries through downstream and upstream industry channels. Therefore, it allows to track how countries contribute within GVCs into the production of final goods by specializing in segments where they exploit their comparative advantage. The TiVA database covers 62 economies, of which a group of 28 are members of the “B&R Economies” as defined above.<sup>4</sup> Economies that integrate into GVCs, and regardless of their position, are either sellers or buyers of valueadded. On the one hand, they supply intermediate goods to foreign industries. On the other hand, they import foreign goods for their own production purposes. Therefore, Koopman et al. (2014) and Wang et al. (2013) propose to look at the phenomenon of vertical integration from both the importing and the exporting side. We use their battery of indicators in the context of B&R Economies.

We determine the origin of value-added in exports in the B&R Economies using the Leontief decomposition. The Leontief decomposition of input-output tables that tracks the value-added by source country and industry. The Leontief insight lies in determining how much an economy has sourced from its partners. We exploit it to showcase the share of value-added that B&R Economies source form different country groups. We analyze the extent to which trade among B&R Economies is GVC driven, pointing out which countries are the most important. We find that China and the Russian Federation are the key partners for these economies.

As a third step, we look at how the value-added is used and the amount of vertical specialization embedded in exports. We use the decomposition developed by Wang et al. (2014) which traces value-added by final use. The decomposition complements the Leontief insight by showing which exports are going to serve final consumption and count the amount of value-added that is going to eventually return home. The decomposition allows for identifying the extent of vertical specialization embedded in trade flows, which in turn reveals if GVC trade is prevalent among these economies. Once again, the heterogeneity of the B&R Economies manifests itself. ECA and EPA have high shares of vertical trade while MENA and SAR are only mildly integrated.

> 3 Notice the crucial difference between Value Chains which are a succession of business functions (marketing, R&D, distribution, conception and production) and supply chains which are a succession of sales and acquisition of raw materials in view of manufacturing.

> 4 In addition, we provide for the sake of robustness an analysis of the EORA database in the Appendix (A1, A2 and A3) which has higher country coverage, with 171 economies, 63 of which B&R, at the expense of some quality issues.

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