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The Nature and Growth of Vertical Specialization in World Trade

53 Pages Posted: 14 May 1999  

David L. Hummels

Purdue University - Department of Economics; National Bureau of Economic Research (NBER)

Jun Ishii

Amherst College; University of California, Irvine - Department of Economics

Kei-Mu Yi

Federal Reserve Bank of Philadelphia

Date Written: March 1999

Abstract

Dramatic changes are occurring in the nature of international trade. Production processes increasingly involve a sequential, vertical trading chain stretching across many countries, with each country specializing in particular stages of a good's production sequence. We document a key aspect of these vertical linkages-the use of imported inputs in producing goods that are exported -- which we call vertical specialization. Using input-output tables from the OECD and emerging market countries we estimate that vertical specialization accounts for up to 30 percent of world exports, and has grown as much as 40 percent in the last twenty-five years. The key insight about why vertical specialization has grown so much lies with the fact that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods-in-process cross multiple borders. Hence, even small reductions in tariffs and transport costs can lead to extensive vertical specialization, large trade growth, and large gains from trade. We formally illustrate these points by developing an extension of the Dornbusch-Fischer-Samuelson ricardian trade model.

JEL Classification: F1

Suggested Citation

Hummels, David L. and Ishii, Jun and Yi, Kei-Mu, The Nature and Growth of Vertical Specialization in World Trade (March 1999). FRB of New York Staff Report No. 72. Available at SSRN: https://ssrn.com/abstract=163193 or http://dx.doi.org/10.2139/ssrn.163193

David L. Hummels

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jun Ishii

Amherst College ( email )

Amherst, MA 01002
United States

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Kei-Mu Yi (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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