Bilateral Political Relations And Value-added Trade In The Context Of Global Value Chain

How do political relations affect country’s real trade gains and global value chains(GVC)production cooperation? Existing relevant literature on the influence of political relations on economic and trade exchanges shows that the enhance of political relations can promote trade between the two countries,and political conflicts will hinder trade exchanges.However,existing research remains at the analysis of total trade,and has not yet considered value-added trade in the context of GVC.The development of GVC has resulted in the simultaneous existence of multi-country value-added in total trade.It is impossible to understand the true trade gains obtained by exporting countries in trade according to total trade data.While the domestic value-added is the true value provided by exporting countries.Moreover,in addition to economic and trade exchanges and cooperation between countries,the influence of political relations on value chains production cooperation has not yet received attention.Nowadays,international relations are becoming increasingly complex and anti-globalization forces are rapidly expanding.It is increasingly important to understand whether political relations can increase country’s real trade gains and maintain or promote GVC cooperation.Therefore,this article conducts research on how political relations affect the real trade gains of exporters and production cooperation in GVC from the perspective of GVC.Firstly,this paper sorts out the relevant literature,and proposes the theoretical and empirical research methods used in this article on the basis of existing research.Relevant literature mainly includes the influence of political relations on bilateral trade,the quantification of political relations,and GVC decomposition.Among them,literature review on the influence of political relations on bilateral trade is about whether political relations affect and how to affect bilateral trade.And the basic conclusions,research methods and theoretical basis of relevant research are extracted.The research review on the quantitative of political relations is to summarize the methods and data indicators of political relations quantification according to the existing literature,and evaluate the pros and cons of the quantitative methods.So as to provide a reference for the quantification of political relations in this paper.The literature review of GVC decomposition is to understand the current research progress in the field of value added decomposition from three perspectives: product level,industry level and enterprise level.The theoretical and empirical research methods used in this article are proposed by summarizing and reviewing the existing literature.Secondly,the paper conducts empirical research on how international political relations affect value-added trade and GVC cooperation.In order to obtain universal laws and more reliable research conclusions in various countries,this part conducts research on a large sample of multiple countries around the world.It uses the relevant data of 42 major international economies from 2000 to 2014.First,empirical analysis of how political relations affect total exports which convenient for comparison with existing studies.Then,estimate and compare the value-added of the exporting country and foreign countries respectively to understand the changes in the real trade gains of the exporter.Finally,it distinguishes between intermediates,final products,and the three major industries for empirical,and research on the value-added rate of export in the sub-sample to understand the influence of political relations on GVC cooperation and the ways to improve country’s real trade gains.The study finds that: First,improving political relations has significant promotion effect on both export trade and value-added trade between countries,and the impact on domestic value-added trade is greater than the impact on foreign value-added trade.It reflecting that strengthening political relations can effectively improve exporter’s real trade gains.Second,political relations have greater impact on the trade of intermediate products than on the final products,and have greater impact on the manufacturing industries with deeper embedded value chains than on the service industries with shallower embedded value chains.The above results demonstrate the positive effect of improving political relations in promoting GVC cooperation.Third,the way of strengthen political relations can increase the real trade gains of exporters is mainly caused by promoting various industries to use more domestic value-added for production.Thirdly,the article conducts empirical research on how Sino-foreign political relations affect value-added exports and Sino-foreign value chains cooperation.Considering China’s important position in international trade and GVC,it is necessary to conduct a targeted analysis of China’s value-added trade.To this end,I use panel data about China and 61 major trading partner countries from 2005 to 2015,it examines how the political relations affects China’s value-added exports and value chains production cooperation.Also this part conducts in-depth research on the impact mechanism.The study finds that,first,the improvement of Sino-foreign political relations can significantly promote the export of domestic value added,value added of importing countries,and value added of other countries.Among them,political relations have the greatest impact on the value-added of importing countries.At the same time,the increase in domestic value-added exports also reflects the increase in China’s real trade gains.Second,the analysis of heterogeneity shows that the influence of political relations is greater in processing trade than in general trade,and greater in intermediate products than in final products,which reflect the positive role of political relations in promoting production cooperation in the Sino-foreign value chain.Third,the strengthening of political relations can have a significant positive impact on the increase in the value-added rate of importing countries in China’s export trade,promote the production cooperation in the value chain between China and importers,and have a certain crowding-out effect on the value-added rate of other countries.Fourth,mechanism analysis finds that political relations may have an impact on value-added trade through two channels,that are direct government intervention and indirect compensation for market system risks.Fourthly,empirical analysis of how typical political events affect value-added trade and GVC cooperation.Case analysis can better solve the endogenous problems in this research field and provide case support for the previous conclusions.This part of the study selects three typical political conflicts: the Diaoyu Island conflict between China and Japan in 2012,disagreement on sending troops to Iraq between the United States and France’s in 2003,and Muhammad’s comic incident between Islamic countries and Denmark in 2005.The research results show that,first,the typical political conflicts have negative impact on the trade between the two countries as a whole.Second,the results of the Sino-Japanese conflict and the US-French disagreement both show that political conflicts have greater impact on the trade of intermediate goods than on the final products,reflecting that political conflicts have an adverse impact on the GVC cooperation between the two countries.And the impact of the exporter’s value-added is greater than the impact on the value-added of other countries,reflecting that political conflicts have a greater impact on the real trade gains of exporters,and value-added trade of other countries will also be implicated to a certain extent.Finally,the paper conduct research conclusions and policy enlightenment.This part points out the research conclusions of this article.The research shows that political relations have important influence on value-added trade and GVC cooperation.Combining with the realistic backgrounds that facing by China and the world,the paper makes policy implications from strengthening international political mutual trust to maintain free trade and GVC stability,enhancing mutual political trust between China and foreign countries to enhance China’s real trade gains,deepening service industry value chain cooperation through political mutual trust between China and foreign countries,and using politics mutual trust to promotes win-win cooperation in other areas of the world.