joint with Michael Sposi and Jing Zhang

Motivated by increasing trade and fragmentation of production across countries since World War

II, 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. The presence of GVC trade boosts capital accumulation and economic growth and

magnifies dynamic gains from trade. At the same time, endogenous capital accumulation shapes

comparative advantage across countries, impacting the dynamics of GVC trade: a country

becoming more capital abundant concentrates more on the capital-intensive stage of the

production.

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