Trade And Business Cycle Comovement

The relationship between trade integration and business cycle comovement has been concerned especially after 2007 financial crisis.Since Frankel and Rose raised the topic of trade and business cycle comovement,most literatures on this topic has based on gross trade data.However,value-added division has become the one of the major division forms now and as a result,value-added trade becomes increasingly important.Thus,gross trade data could be bias.This paper re-studies the relationship between trade and business cycle comovement based on value-added trade data.Firstly the paper summarizes 4 characteristics of global trade in value-added nowadays:First,the percentage of value-added export in gross export has been declined since 1970.Second,the exports of manufacture based on value-added data are less than on gross data.Service exports are opposite.Third,the proportions of trade in value added in major value-added trade participants are all over 55%.Fourth,value-added exports in the trade region are less than that outside the region.This paper also summarizes 4 characteristics of Chinese value-added trade:First,value-added trade dependent degree has been gone down in 2005 after increasing since 1995.Second,proportion of value-added trade has been declined since 1970.Third,domestic value added of manufacturing export has been increased and that of service export has been decreased.Fourth,Chinese GVC participation is lower than developing countries,and forward GVC participation is lower than backward GVC participation.Furthermore,the paper developed an extended gravity model to estimate the influence effects of trade in value added.The results are as follows:First,free trade agreement is not significant,which is different from traditional gross trade.Second,the greater the difference of factor endowment,the greater the value-added trade integration level.Third,FDI is an important factor because FDI is an significant way for transnational corporations to build GVCs.Secondly,the paper analyses the specific influence of trade in value added to business cycle comovement theoretically.There are 3 ways of this influence.First,"binding effect".Participants are embedded in GVC and affected by participants forward and backward.Second,"elastic effect".Participants focuses on certain process and thus lack of electricity.Third,"bullwhip effect".Stock adjustment enlarges the impact of business crisis.Thirdly,the paper studies the impact of trade in value added in business cycle comovement empirically.The results show that trade in value added leads to higher business cycle comovement.China’s experience is in accordance with international experience.Fourthly,the paper measures the upstreamness of GVC division of major economies and analyses the impact factors of upstreamness.The results show that China is in the middle position of GVC and developed countries are in the downstream.The positions are all stabilized.Important impact factors are strength of legal rights and factor endowment.Relative upstreamness weakens the impact of value-added trade on business cycle.Fifthly,the paper analyses the role of GVC players and its impact on value-added trade’s influence in business cycle.The leaders of GVC have strong capability of dispersion and defense.Finally,based on the conclusion of theoretical analysis and empirical research,the present dissertation puts forwards political suggestions.First,strength the defensive capability in GVC view.Second,upgrade value chain and defend crisis from forward and backward.Third,build GVCs using OFDI.