Title: The Impact of Value-added Trade and Value Chain Embeddedness on Economic Cycle Linkage in China, Japan, and South Korea

Authors: Feng Xiaoling, Zhao Xin, Liang Yiyao

Abstract: Northeast Asia is an important global economic engine, and its core countries (China, Japan, and South Korea) play an important role in the global value chain (GVC). Based on the decomposition of the input- output tables of China, Japan, and South Korea from the ADB-MRIOTs (Asian Development Bank Multiregional Input-Output Tables), this paper verifies the characteristics of the economic cycle linkage in China, Japan, and South Korea. It constructs a double fixed effect model and studies the impact of value-added trade and value chain embeddedness on the economic cycle linkage among China, Japan, and South Korea. The results show that both value-added trade and value chain embeddedness can positively impact this linkage. In addition, embeddedness within the same industrial value chain has a “crowding out” effect on value-added trade, which would weaken the business cycle co-movement. However, this “crowding out” effect is not evident among industries, and there is a regulating effect that strengthens the economic cycle linkages. Furthermore, the test of industrial heterogeneity shows that among the three countries, value-added trade within manufacturing industries has a stronger transmission effect on the economic cycle link age, while value chain embeddedness has a stronger transmission effect on the economic cycle linkage between the manufacturing and service industries.

Keywords: Value-added Trade, Value Chain Embeddedness, Economic Cycle Linkage, ChinaJapan-South Korea