Working Paper: CEPR ID: DP4872
Authors: James Markusen; Anthony J. Venables
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.
Keywords: fragmentation; multicountry; multinationals; trade costs
JEL Codes: F11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| difference between factor endowment and world endowment (F29) | production specialization (L23) |
| trade costs (F19) | production specialization (L23) |
| fragmentation (F12) | production specialization (L23) |
| fragmentation (F12) | trade volume (F10) |
| trade costs (F19) | trade volume (F10) |
| trade costs approaching zero (F19) | trade volume (F10) |
| trade costs approaching zero (F19) | production specialization (L23) |