Fragmentation and Trade in Value Added Over Four Decades∗

We bring together time series data on trade, production, and input-use to compute the value added content of trade over the past four decades (1970-2009). Comparing the ratio of value added to gross exports, we measure changes in production fragmentation for the world as a whole, individual countries, and bilateral trade partners. For the world, the share of value added in trade falls by 10 to 15 percentage points, with twothirds of the decline occurring in the last two decades. Across countries, declines range from roughly zero to 25 percentage points, with large declines concentrated among fast growing countries undergoing structural transformation. At the bilateral level, there are large differences in size and timing of changes across trading partners. We exploit this variation to show that both non-policy and policy barriers to trade are significant determinants of bilateral fragmentation. For example, we find that regional trade agreements promote fragmentation. ∗We thank Rudolfs Bems, Emily Blanchard, Andreas Moxnes, Nina Pavcnik, and Kei-Mu Yi for helpful comments. Johnson thanks the Rockefeller-Haney fund at Dartmouth College for financial support, as well as Joseph Celli, Michael Lenkeit, and Sean Zhang for research assistance. †Department of Economics, Dartmouth College, Hanover, NH 03755, USA. E-mail: [email protected]. ‡Columbia Business School, Uris Hall, 3022 Broadway, New York, NY 10027, USA. E-mail: [email protected].