Trade Integration, Global Value Chains, and Capital Accumulation

Motivated by increasing trade and fragmentation of production across countries, accompanied by income convergence by many emerging economies, we build a dynamic two-country model featuring sequential, multi-stage production and capital accumulation. As trade costs decline over time, global-value-chain (GVC) trade expands across countries, particularly more in the faster growing country, consistent with the empirical pattern. Via Heckscher-Ohlin forces, GVC trade can generate back-and-forth feedback between comparative advantage and capital accumulation (growth). Moreover, GVC trade increases both steady-state and dynamic gains from trade.