We combine data on trade, production, and input use to document changes in the value-added content of trade between 1970 and 2009. The ratio of value-added to gross exports fell by roughly 10 percentage points worldwide. The ratio declined 20 percentage points in manufacturing, but rose in nonmanufacturing sectors. Declines also differ across countries and trade partners: they are larger for fast-growing countries, for nearby trade partners, and among partners that adopt regional trade agreements. Using a multisector structural gravity model with input-output linkages, we show that changes in trade frictions play a dominant role in explaining all these facts.

Cross-border production chains tend to include geographically proximate countries. This suggests that increases in fragmentation should be largest among nearby trading partners, and thus may serve to localize gross trade. Using data on gross and value added trade from 1970-2009, we present three results supporting this conjecture. First, value added to export ratios are lower and falling more rapidly within geographic regions than between them. Second, gross trade travels shorter distances from source to destination than value added trade, and this gap is growing over time. Third, bilateral value added to export ratios have fallen most among nearby trading partners.

A common view is that cross-border vertical linkages played a key role in the 2008–2009 collapse of global trade. This paper presents two accounting results from a global input-output framework that shed light on this channel. We feed in observed changes in final demand and find that trade in final goods fell by twice as much as trade in intermediate goods. Nevertheless, intermediate goods account for more than two-fifths of the trade collapse. We also find that vertical specialization trade fell 13 percent, while value-added trade fell by 10 percent, because declines in demand were largest in highly vertically-specialized sectors.

How do global value chain (GVC) linkages modify countries’ incentives to impose import protection? Are these linkages important determinants of trade policy in practice? We develop a new approach to modelling tariff setting with GVCs, in which optimal policy depends on the nationality of value-added content embedded in home and foreign final goods. Theory predicts that discretionary tariffs will be decreasing in the domestic content of foreign-produced final goods and the foreign content of domestically produced final goods. Using data for 14 countries between 1995 and 2015, we show that governments set lower tariffs and curb their use of temporary trade barriers where GVC linkages are strongest, consistent with theory. Turning to quantitative model counterfactuals, we find that severing GVC linkages would lead to the disappearance of tariff preferences. Further, targeted policies to decouple China from GVCs would increase the optimal tariff set by G7 countries on Chinese exports.