Working Paper: CEPR ID: DP7802
Authors: James R. Markusen
Abstract: The basic gains-from-trade theorem makes a stark comparison between completely free trade and complete autarky. This paper is motivated by recent evidence that trade has greatly expanded on the extensive margin (aka fragmentation, offshoring) by adding newly traded goods and services and that much of this new trade is in intermediates. I provide an extension of existing gains-from-trade results by allowing trade in an added set of final and/or intermediate goods. As seems generally understood, a sufficient condition for all countries to gain from fragmentation is that the relative world prices of initially-trade goods don't change. However, trade costs break the strict link between domestic and world prices in my approach and this results in interesting subtleties as initially-traded goods change their trade status following fragmentation. I illustrate these results by applying them to two recent and quite specific formulations of expansion at the extensive margin: Grossman and Rossi-Hansberg (2008) and Markusen and Venables (2007). Symmetry in two senses results in gains for all countries: countries are relatively symmetric in size and the newly-traded goods are relatively symmetric in their factor intensities with respect to the world endowment ratio.
Keywords: extensive margin; fragmentation; offshoring; trade in tasks; vertical specialization
JEL Codes: F10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial price stability (E31) | Positive welfare outcomes across all participating countries (I31) |
| Trade costs (F19) | Divergence of domestic prices from world prices (F16) |
| Divergence of domestic prices from world prices (F16) | Adverse effects for some countries (F35) |
| Symmetry in size and factor intensities among countries (F12) | Minimization of negative terms-of-trade changes (F16) |
| Deterioration in terms of trade (F14) | Violation of symmetry conditions (C62) |
| Fragmentation introduces both labor-intensive and capital-intensive tasks (F12) | Mitigation of adverse price movements (G13) |
| Failure to meet all conditions (C62) | Countries still benefit from trade (F10) |