Domestic trade costs, input sourcing, and the value-added content of exports: Evidence from China’s inland waterways

China's domestic value-added ratio (DVAR) in exports has risen despite deeper integration into global value chains, a pattern at odds with most developing economies. We examine whether improvements in domestic inland waterway transportation infrastructure can explain this divergence. We develop a theoretical framework that identifies two channels through which lower inland trade costs raise DVAR: a relative-price channel favoring domestic intermediates and an extensive-margin channel that expands access to domestic suppliers. Using firm-level data from 2000 to 2013 and a difference-in-differences design that exploits the Three Gorges Dam's staged construction as a quasi-natural experiment, we find that improved Yangtze River navigability increased firms' DVAR by 6.2 percent. The effects are particularly pronounced for private firms and processing trade firms and are amplified in waterway-dependent industries. We further show that these DVAR gains translate into enhanced revealed comparative advantage at both national and global levels. These results identify domestic waterway transport infrastructure as a previously overlooked mechanism behind China's rising export value capture and offer broader lessons for developing economies seeking to strengthen competitiveness through infrastructure investment.

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