Working Paper: CEPR ID: DP10932
Authors: Richard Frensch; Jan Hanousek; Even Koenda
Abstract: Using the factor-proportion based gravity framework we identify driving forces for trade in parts and components. We test our model empirically by using a detailed and large data set of European trade in parts and components of capital goods and show that such trade between East and West Europe is driven by relative supply-side country differences, compatible with models of incomplete specialization and trade. We take our results as evidence for the existence of international East-West production networks in Europe, driven by trade-offs between wages and coordination costs. Our results also reveal that in response to stronger relative wage differences trade in parts and components across Europe is predominantly realized along the extensive margin.
Keywords: European Union; Gravity Model; International Trade; Panel Data; Production Networks
JEL Codes: C23; F14; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage differences (J31) | trade volumes (F10) |
| higher wage-rental ratios (R21) | export of capital-intensive parts and components (F10) |
| lower wage-rental ratios (R21) | import of labor-intensive components (F16) |
| relative wage differences (J31) | elasticity of trade flows (F14) |
| relative wage differences (J31) | trade along extensive margin (F10) |
| wage differences (J31) | location choices for production networks (R32) |
| relative wages (J31) | ex ante investment decisions (G11) |