A Tale of Two Networks: Global Value Chains and Trade Disputes

Abstract

This study examines the impact of the global value chain (GVC) network on the temporary trade barriers (TTB) network and its welfare implications. We present a simple analytical framework in which agents in each country are connected through two layers of directed economic-legal networks, and derive a set of propositions. Our findings indicate that a country’s centrality in the GVC network is closely linked to its centrality in the TTB network, and intermediate goods are more likely to be affected by TTB measures than final goods. Leveraging extremely detailed Chinese manufacturing firm-level production and trade data, we conduct a simulated method of moments (SMM) counterfactual analysis and a case study to provide new insights into the welfare efficiency of granular TTB measures from the perspective of emerging and transitional countries such as China within a multilayer network context.

Keywords: Temporary trade barriers (TTB), Global value chain (GVC), Multilayer network, Simulated method of moments (SMM), Natural language processing (NLP)