Vertical Specialization and the Changing Nature of World Trade

Abstract

A major feature of globalization has been the enormous increase in international flows of goods and services: countries are now trading much more with each other. In this article, the authors demonstrate the greater role vertical specialization is playing in these increased flows. Vertical specialization occurs when a country uses imported intermediate parts to create a good it later exports - that is, the country links sequentially with other countries to produce a final good. Deriving evidence from four case studies as well as OECD input-output tables, the authors reveal that vertical specialization has accounted for a large and increasing share of international trade over the last several decades. They also note that because the trends encouraging vertical specialization - lower trade barriers and improvements in transportation and communications technologies - are likely to continue, this type of international trade should become even more prevalent in the next century.

Keywords: vertical specialization

JEL Classification: F1, F14, F23