Ref.: Ms. No. IEEP-D-10-00038

International Value Chains and The World Trade Collapse: A Cross-Country Perspective

International Economics and Economic Policy

Dear prof dr van bergeijk,

Reviewer's comments on your work have now been received. You will see that it is advising against publication of your work. Therefore I must reject it.

For your guidance, I append the reviewer's comments below.

Thank you for giving us the opportunity to consider your work.

Yours sincerely

Thomas Domeratzki

Editorial Assistant

International Economics and Economic Policy

Reviewer's comments:

Reviewer: Summary

The paper "International Value Chains and the World Trade Collapse: A Cross Country Perspective" examines the role of vertical value chains in the trade collapse of 2008/09. Using a cross-country estimation, the decrease in imports between 2008-2009 is regressed on the degree of vertical value chains (as measured by (i) manufacturing products in total imports and (ii) an index capturing the degree of vertical specialization) as well as some control variables. In focusing on imports as endogenous variable, the paper differs from traditional contributions that primarily investigate the effects on export flows. Also, the results differ from the recent literature with respect to causality: The author argues that vertical fragmentation is not amplifying but rather dampening the trade crunch of 2008-2009. The subject of the paper is interesting and, as it refers to the actual trade collapse, it also fits into a growing part of the international trade literature. However, the role

of vertical value chains in the trade collapse is not well established in the paper.

Major Points

I. The paper is not well motivated. Apart from the fact that the analysis of trade in 2008-2009 attracts interest by its own, the paper does not present any motivation on why to study this issue. Moreover, the introduction does not contain a specific literature review that discusses the current state of contributions in the field. To be sure, the author mentions some papers, however, without discussing any results. He solely mentions econometric techniques that are used by other contributions in order to motivate that there is a lack of cross section analysis that he tries to fill with this paper. The absence of a detailed discussion of previous results raises several questions, especially with respect to the economic crisis, where there is a time structure intrinsic to the phenomenon. E.g.: why should there be the need to abstract from the time series? Furthermore, as the results in this paper contradict with the current view on the role of the sourcing mode for the

strength and duration of the crisis, the introduction should include a discussion on causalities and not exclusively on econometric technology. On this account, the reader expects a survey as regards the state of the art, the results thus far, what drove these results (i.e. causalities) and why (the true) causalities might differ from those presented in the literature thus far.

II. The author mentions that the data is preliminary and will be "updated and revised in the next quarters". Since the contribution of the paper is solely an empirical one, it is disputable if one should employ a preliminary dataset, especially if, in addition, key results conflict with the state of the literature.

III. Since the results in this contribution claim the exact opposite of what we know from the recent literature, the author may want to extend the analysis in a number of ways, in particular:

1. First, why do other contributions arrive at the result that international value chains amplify the trade crisis? What is the story and the theoretical reasoning behind those findings?

2. Second, the reader misses sort of a formal model or at least a discussion on how the results attained in this contribution can be explained. Why does vertical fragmentation dampen rather than amplify the trade crisis here?

3. The econometric estimation is characterized by some problems that need to be addressed:

3.1 There should be a serious endogeneity problem between import flows and vertical fragmentation (or manufacturing inputs as a share of imports) that at least requires discussion in the paper. Even if the author is able to tackle this problem by focusing on exogenous variables that are observed before the time of the crisis, the point should be discussed, whether this time structure is suitable for solving the endogeneity problem, or whether there should be other instruments used in order to deal with this problem.

3.2 Is it really possible to examine the role of fragmentation in the trade collapse when having access to data that covers only such a short period of time?

3.3 The index of vertical specialization that is used is not defined neither is it explained. The author draws on data from an OECD report without explaining how the index is defined and what the index is capturing. Since "vertical specialization" is by no means a clearly defined phenomenon (see the extensive literature on this and the variety of measures that has been used thus far), it is necessary to explain exactly what is used as main exogenous variable.

4. Since the analysis is fragile, conclusions and policy recommendations provided in section 5 need to be framed more carefully.

Minor Points

I. The text and the writing is somewhat sloppy (lots of typos etc.)

II. In the regression equations on p.8, there is the constant missing. In addition, there are no subscripts indicating countries, changing rates, levels, etc. Generally speaking, the author may want to be more exact when presenting formulas and math.

III. The usage of the exogenous control variables could be expanded. Maybe the author could explain why not to use the GDP variable in regression 2?

IV. Presenting the t statistic additional to the p value is useless in the discussion of the regression results. When explaining results, it is common practice to talk about significance levels of 1, 5 or 10 percent and not the inverse levels of 90, 95, or 99 percent.

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