Vertical specialization across the world: A relative measure
Introduction
Over the last decades, international trade has grown strongly and its pattern has evolved significantly. The international fragmentation of production, i.e., the division of the production chain with different countries specializing in particular stages of the production sequence, has been an important feature of the deepening structural interdependence of the world economy in recent decades (see Arndt and Kierzkowski, 2001). This fact resulted in a growth of trade in parts and components that exceeds that of trade in final goods. There are no comprehensive statistics to measure the role of international production and trade networks across many countries, products and time. Although some partial evidence can be drawn from the analysis of different data sources (such as customs statistics, international trade flows, Input-Output tables and firm-level data), it is important to develop systematic and internationally comparable empirical evidence on international production linkages.
This article investigates one aspect of international production linkages that, following Hummels, Ishii, and Yi (2001), is commonly designated as vertical specialization (VS) - the use of imported inputs to produce goods that are afterwards exported. We propose a relative measure of VS-based trade that combines information from Input-Output matrices and international trade data, producing comparable results for a large sample of individual countries and geographical areas with a detailed product breakdown over the 1967-2005 period.
The measure associates countries’ trade flows with VS activities through the use of thresholds. One initial threshold establishes technological links by determining whether a particular input i is important in producing an output j. A second threshold establishes whether, for an identified technological link and in a particular country, the export share of product j and the import share of product i simultaneously and significantly exceed the respective world average shares. Next, for each country/product pair previously identified, a proxy of the level of VS-based trade is obtained by considering the value of intermediate imports that surpasses the one defined by the second threshold. In other words, we argue that, for a country p, a simultaneous high export share of a specific product and a high import share of an intermediate good used in its production, relative to the world average, provide indirect evidence of VS. By quantifying this “excess” of intermediate imports, we obtain a proxy of trade related to VS activities. The proposed measure has a relative nature because it bases the yearly identification and quantification of VS activities on trade flows whose relative dimension is above an international threshold. The measure is perceived as conservative because, in dynamic terms, it only captures the cases where the increase of actual VS activities is strong enough to translate into a level of intermediate imports that surpasses what is implied by the international threshold, which is also changing over time. Nonetheless, the measure has adequate additive properties in the sense that, in each period, the results of each pair country/product can be summed to provide any upper-level product or geographical breakdown of VS-related trade.
The article is organized as follows. Section 2 reviews the main empirical approaches used to measure the international fragmentation of production. In Section 3, the relative measure of VS is presented and its general intuition is discussed. In addition, Section 3 formalizes the methodology and describes the data sources. Section 4 illustrates the evolution of VS activities in the world over the last four decades using a product breakdown by technological intensity and a geographical breakdown by main areas. A special focus is put on the evolution of VS-based trade in East-Asia and in high-tech goods, since these are the cases where the most substantial increases occurred over the last two decades. Section 5 presents some concluding remarks.
Section snippets
Measuring the international fragmentation of production
One of the factors underlying the high growth rate of international trade over the past two decades is the division of the production chain, with different stages of production located in different countries (see Jones, Kierzkowski, & Lurong, 2005; Yi, 2003). This phenomenon has been labeled in the literature as “vertical specialization”, “slicing up the value chain”, “outsourcing”, “offshoring”, “international production sharing”, “disintegration of production”, “multi-stage production”,
Methodology and data
One of the most serious limitations of the I-O based methods is the access to up to date matrices and the difficulty to perform accurate cross-country comparisons. In fact, I-O matrices are computed sparsely in time and across countries, and sometimes with different product breakdowns. Thus, it is difficult to produce an assessment of how dynamic are VS activities across countries. This section proposes a relative measure of VS-based trade in the spirit of Hummels et al. (2001), i.e., the use
Measuring vertical specialization across the world
This section provides an illustration of the main results at the world level over the last four decades. The detailed analysis of the results both at the country and at the product levels is beyond the scope of this article and will be developed in future work. In order to facilitate the analysis, VS-based trade is presented as a percentage of total world imports. The section also includes a sensitivity analysis. This is important because the method requires choices on crucial aspects as the
Conclusions
Vertical specialization (VS) activities, as defined by Hummels et al. (2001), stand as a new paradigm in the organization of world production and represent an important element of international trade. Therefore, it is important to date its evolution and map its distribution across countries and products in a comparable and flexible way. This article introduces a new relative measure that uses simultaneously information from Input-Output (I-O) matrices and from international trade statistics to
Acknowledgements
The authors thank seminar participants at the ETSG 2008 Annual Conference in Warsaw and two anonymous referees for valuable comments.
References (47)
Globalization and the open economy
The North American Journal of Economics and Finance
(1997)- et al.
Production fragmentation and trade integration: East Asia in a global context
The North American Journal of Economics and Finance
(2006) - et al.
Vertical specialization and three facts about U.S. international trade
The North American Journal of Economics and Finance
(2005) Fragmentation in simple trade models
The North American Journal of Economics and Finance
(2001)A trade theorist’s take on skilled-labor outsourcing
International Review of Economics and Finance
(2005)- et al.
Cross-border sourcing and outward processing in EU manufacturing
The North American Journal of Economics and Finance
(2001) - et al.
Patterns of international fragmentation of production and the relative demand for labor
The North American Journal of Economics and Finance
(2005) - et al.
The nature and growth of vertical specialization in world trade
Journal of International Economics
(2001) - et al.
International fragmentation and the new economic geography
The North American Journal of Economics and Finance
(2005) - et al.
What does the evidence tell us about fragmentation and outsourcing?
International Review of Economics and Finance
(2005)
Assembly trade and technology transfer: The case of China
World Development
Overseas assembly and country sourcing choices
Journal of International Economics
Fragmentation and multinational production
European Economic Review
Offshoring in a knowledge economy
The Quarterly Journal of Economics
Global sourcing
Journal of Political Economy
Trade liberalization and “revealed” comparative advantage
The Manchester School of Economic and Social Studies
On some effects of international fragmentation of production on comparative advantages, trade flows and the income of countries
The World Economy
Trade verticality and structural change in industries: The cases of Taiwan and South Korea
Open Economies Review
Country and industry-level determinants of vertical specialization-based trade
International Economic Journal
Cited by (64)
How do real and monetary integrations affect inflation dynamics?
2023, International EconomicsImpact of the “Belt and Road Initiative” on machinery production networks
2021, Economic ModellingCitation Excerpt :Advances in technology have reduced the problematic aspects of distance in production and, in turn, have reduced service-link costs and facilitated the fragmentation and outsourcing of outputs, particularly in parts and components trading. An input–output table (Feenstra and Hanson, 1996; Hummels et al., 1998; Chen and Chang, 2006; Amador and Cabral, 2009; Baldwin and Lopez-Gonzalez, 2015; Chen, 2016; Ito and Vézina, 2016; Yu and Luo, 2018) and trade statistics (Yeats, 2001; Orefice and Rocha, 2014; Márquez-Ramos and Martnez-Zarzoso, 2014) are commonly used to quantify the extent of international fragmentation in production. However, an input–output table is not updated regularly.
International location selection for production fragmentation
2021, Expert Systems with ApplicationsImport Content of Turkish Production and Exports: A sectoral analysis
2020, Central Bank ReviewCitation Excerpt :Breda et al. (2008) examine the import content of exports for seven European countries and provide estimates for the degree of internationalization, the extent to which firms use inputs from international suppliers. Combining the IOTs with international trade data, Amador and Cabral (2009) develop a vertical specialization measure and test it on a large dataset of 79 countries. Their results suggest a substantial increase in vertical specialization in high-technology products and in East Asia.
Implications of measuring value added in exports with a regional input-output table. A case of study in South America
2020, Structural Change and Economic DynamicsCitation Excerpt :Each country step incorporates value added in the product, until it is finished to satisfy the final demand of the destination country. Different approaches such as “outsourcing” (Feenstra and Hanson, 1996), “trading tasks” and “offshoring” (Grossman and Rossi-Hansberg, 2008, 2006), “international production sharing” (Wang et al., 2013), “slicing up the value chains” (Timmer et al., 2014), or “vertical specialization” (Amador and Cabral, 2009; Hummels et al., 2001; Yi, 2003) have been recently developed to unravel the increasing complexity of this phenomena. Global value chains have reshaped the global economy: they have been drivers of growth (World Bank, 2017) and innovation (Zhang and Gallagher, 2016), with positive and negative implications on social aspects and employment (Alsamawi et al., 2014; Bartley Johns et al., 2015; Simas et al., 2014) and the environment (Kanemoto et al., 2012; Meng et al., 2018; Wiedmann and Lenzen, 2018).