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A Multi-Country Approach to Factor-Proportions Trade and Trade Costs

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  • Markusen, James R.
  • Venables, Anthony J.

Abstract

Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multi-stage production, and country-specific trade costs. We derive patterns of production specialization and trade for a matrix of countries that differ in relative endowments (columns) and trade costs (rows). We demonstrate how the ability to fragment production and/or a proportional change in all countries’ trade costs alters these patterns. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export-platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4872.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4872

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Keywords: fragmentation; multi-country; multinationals; trade costs;

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References

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  1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  2. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, December.
  3. Hanson, G.H., 1999. "`Market Potential, Increasing Returns, and Geographic Concentration," Working Papers 439, Research Seminar in International Economics, University of Michigan.
  4. Deardorff, A.V., 1998. "Fragmentation Across Cones," Papers 98-14, Michigan - Center for Research on Economic & Social Theory.
  5. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  6. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
  7. Andrew B. Bernard & Stephen Redding & Peter K. Schott, 2005. "Factor Price Equality and the Economies of the United States," CEP Discussion Papers dp0696, Centre for Economic Performance, LSE.
  8. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2001. "Expansion Strategies of U.S. Multinational Firms," BEA Papers 0012, Bureau of Economic Analysis.
  9. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
  10. Arndt, Sven W. & Kierzkowski, Henryk (ed.), 2001. "Fragmentation: New Production Patterns in the World Economy," OUP Catalogue, Oxford University Press, number 9780199243310, October.
  11. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," NBER Working Papers 6849, National Bureau of Economic Research, Inc.
  12. Norman, Victor D & Venables, Anthony J., 1993. "International Trade, Factor Mobility and Trade Costs," CEPR Discussion Papers 766, C.E.P.R. Discussion Papers.
  13. Donald R. Davis & David E. Weinstein, 1998. "Market Access, Economic Geography and Comparative Advantage: An Empirical Assessment," Harvard Institute of Economic Research Working Papers 1850, Harvard - Institute of Economic Research.
  14. Markusen, James R., 1983. "Factor movements and commodity trade as complements," Journal of International Economics, Elsevier, vol. 14(3-4), pages 341-356, May.
  15. John Luke Gallup & Jeffrey D. Sachs & Andrew D. Mellinger, 1998. "Geography and Economic Development," Harvard Institute of Economic Research Working Papers 1856, Harvard - Institute of Economic Research.
  16. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  17. Ng, Francis & Yeats, Alexander, 1999. "Production sharing in East Asia : who does what for whom, and why?," Policy Research Working Paper Series 2197, The World Bank.
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Cited by:
  1. Subhayu Bandyopadhyay & Sugata Marjit & Vivekananda Mukherjee, 2010. "Incidence of an outsourcing tax on intermediate inputs," Economics Bulletin, AccessEcon, vol. 30(2), pages 1271-1277.
  2. Markusen, James R., 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," CEPR Discussion Papers 5408, C.E.P.R. Discussion Papers.
  3. James R. Markusen & Bridget Strand, 2007. "Trade in Business Services in General Equilibrium," NBER Working Papers 12816, National Bureau of Economic Research, Inc.

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