How Does Economic Policy Uncertainty Impact a Country's Position in Global Value Chains?

• Published date: 01 September 2024
• Author: Jiaxuan Zhang,Hongsheng Zhang,Xuhang Shen,Bo Meng
• Date: 01 September 2024
• DOI: http://doi.org/10.1111/cwe.12547

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 28–52, Vol. 32, No. 5, 2024

28

How Does Economic Policy Uncertainty Impact a

Country’s Position in Global Value Chains?

Jiaxuan Zhang, Hongsheng Zhang, Xuhang Shen, Bo Meng*

Abstract

Economic globalization in the 21st century has been characterized by the rise and spread

of global value chains (GVCs). It faces significant challenges due to increasing domestic

and international policy uncertainty in the context of emerging mega risks like geopolitical

tensions and climate change. This paper begins by constructing a theoretical model for

an open economy to study how risk-averse firms make decisions regarding the sourcing of

intermediate inputs in an uncertain environment. Our model solution proposes that firms will

source fewer intermediate inputs from countries with more economic uncertainty. An increase

in domestic and foreign uncertainty will have opposite impacts on a country’s position in

GVCs. In this sense, we argue that a country tends to move downstream along GVCs if

its own economic policies become more uncertain, and it tends to move upstream with an

increase in the uncertainty of its trading partner countries. Our regression analyses, based

on data including the World Input–Output Database, World Development Indicators, the UN

Comtrade database, and the Economic Policy Uncertainty Index, provide empirical support

for this model-based conclusion. Our findings highlight that a nation must consider foreign

economic policy uncertainty and maintain domestic policy stability to participate in GVCs.

Keywords: economic policy uncertainty, global value chain, GVC participation, GVC position

JEL codes: D21, D24, F10, F14

I. Introduction

Joining global value chains (GVCs) has been regarded as one of the most efficient and

crucial ways for countries to gain more jobs and added value from the global market.

*Jiaxuan Zhang, Postgraduate Student, Institute of Economics, School of Social Sciences, Tsinghua University,

China. Email: zjx22@mails.tsinghua.edu.cn; Hongsheng Zhang (corresponding author), Associate Professor,

China Academy of Digital Trade, Zhejiang University, China. Email: hongshengzhang@zju.edu.cn; Xuhang Shen,

Postdoctoral Researcher, HSBC Business School, Peking University, China. Email: shenxuhang@pku.edu.cn;

Bo Meng, Senior Researcher, Institute of Developing Economies, Japan External Trade Organization, Japan,

and Visiting Professor, Collaborative Innovation Center for Emissions Trading System Co-constructed by the

Province and Ministry, Hubei University of Economics, China. Email: Bo_Meng@ide.go.jp. The authors are

grateful for support from the National Natural Science Foundation of China (No. 72273125), the Zhejiang

Provincial Philosophy and Social Sciences Planning Project (Nos. 22NDQN203YB and 22ZJQN13YB), and the

Japanese KAKEN project (No. 24K04853).

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

[Correction added on 14 October 2025, after first online publication: The copyright line was changed.]

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Economic Policy Uncertainty and GVCs 29

Whether, and to what extent, a country can successfully participate in GVCs depends

not only on its comparative advantage in terms of labor and capital endowments but also

on the economic policy uncertainty (EPU) faced by firms and businesses in the country.

The past few years have likely witnessed the highest level of EPU, which has impacted

the economic performance and international trade of numerous countries significantly,

thereby highlighting the need to examine the impact of EPU on GVCs. Figure 1 shows

the global EPU index in recent years.

Figure 1. Global economic policy uncertainty index

Source: Davis (2016).

With globalization and the improvement in the trade environment, the production

processes of various industries have undergone profound changes, and trade relations

between countries have become closer and more robust. Global value chains have

formed, enabling the free flow of capital, technology, and other factors of production

among different countries and deepening the division of labor within the product’s

decomposable value chain links. They are the most prominent feature of globalization

(Amador and Cabral, 2016), and they have become a new lens through which to

examine current global production and commerce. Much literature has constructed GVC

accounting frameworks to calculate the added value and several methods have been

proposed to measure participation and position in GVCs (Koopman et al., 2010, 2014;

Antràs and Chor, 2013; Wang et al., 2013).

In recent years, many developing countries have occupied the middle and bottom

end of the GVCs. Relying on the comparative advantage of their inexpensive labor

resources, numerous developing countries engaged in low-value-added production

stages and became the low-end suppliers of products to developed countries. There

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium, provided the original work is properly cited.