Trade, polarization and human capital in global value chains

Abstract

One of the key driving forces of international fragmentation is the differences in human capital across countries. In this paper, we incorporate the global input-output linkages in the gravity model and explore the role of different skills in determining the bilateral value-added trade. The paper proposes a new mechanism that the bilateral value-added trade depends not only on the bilateral human capital but also that of the third countries engaged in the global value chains. With the cross-border sectoral input-output data covering 43 countries and 34 sectors, we decompose the gross exports into value-added terms and quantify the impact of human capital on value added trade. We find a polarization effect of the skilled, semi-skilled and unskilled labor in the source and destination on the value-added trade. More importantly, we observe an antipolarization impact of human capital from the third countries, which have vertical production linkages with the source or destination through the global value chains, on the bilateral valueadded trade. The results highlight the complementarities of tasks in terms of human capital across countries in the global production value-chains.