Trade Diversion and Production Sharing
Sven W. Arndt
Claremont Colleges - Robert Day School of Economics and Finance
Journal of Economic Assymetries, Vol. 1, No. 1, 2004
This paper examines the repercussions of cross-border production sharing for the welfare effects of preferential trade liberalization. In general-equilibrium context, a free trade agreement (FTA), which incorporates production sharing, raises the likelihood of welfare improvement. Thus, two members of a free trade area, who each have comparative disadvantage in the production of a final product relative to a non-member, may nevertheless enjoy net trade creation if they jointly possess comparative advantages in key components of that product. At a minimum, cross-border production sharing reduces the trade-diverting elements of an FTA. It follows, that rules of origin, viewed as constraints on cross-border fragmentation, augment the negative, trade-diverting elements of free trade area.
Number of Pages in PDF File: 14
Keywords: Trade diversion, free trade areas, fragmentation, production networks
JEL Classification: F11, F13, F15
Date posted: May 4, 2004
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