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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11051.
Length: Date of creation: Jan 2005 Date of revision: Handle: RePEc:nbr:nberwo:11051
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Deardorff, A.V., 1998.
"Fragmentation Across Cones,"
Papers
98-14, Michigan - Center for Research on Economic & Social Theory.
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