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Why Is Manufacturing Trade Rising Even as Manufacturing Output is Falling?

  • Raphael Bergoeing
  • Timothy J. Kehoe
  • Vanessa Strauss-Kahn
  • Kei-Mu Yi

For the OECD as whole, as well as for the U.S., manufacturing exports have been rising, while manufacturing output (both expressed as a share of total GDP) has been falling. We examine the prevalence of this puzzling fact across individual OECD countries, as well as for particular sub-industries of manufacturing. We then address whether the standard international trade paradigms are capable of quantitatively resolving the puzzle. We extend the basic monopolistic competition-cum-Heckscher-Ohlin model to allow for non-homothetic preferences, non-unitary demand elasticities and for changing trade barriers and country-size distributions over time. In a calibrated version of the model, we find that while the extended model can replicate the puzzle qualitatively, it cannot do so quantitatively. We suggest that the unexplained part of the puzzle may be due to vertical specialization – the phenomenon by which countries specialize in particular stages of a good’s production sequence – leading to “back-and-forth” trade, and creating a distinction between ‘gross’ trade and value-added trade. The standard trade paradigms only include value-added trade.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/0002828041302299
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 2 (May)
Pages: 134-138

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:134-138
Note: DOI: 10.1257/0002828041302299
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  1. Vanessa Strauss-Kahn, 2004. "The Role of Globalization in the Within-Industry Shift Away from Unskilled Workers in France," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 209-234 National Bureau of Economic Research, Inc.
  2. Antonio Spilimbergo, 1995. "De-Industrialization and Trade," Research Department Publications 4014, Inter-American Development Bank, Research Department.
  3. Raphael Bergoeing & Timothy J. Kehoe, 2001. "Trade theory and trade facts," Staff Report 284, Federal Reserve Bank of Minneapolis.
  4. 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.
  5. Davis, D.R., 1997. "The Home Market, Trade, and Industrial Structure," Papers 597, Harvard - Institute for International Development.
  6. 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.
  7. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February.
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