External Imbalances in the European Union and International Fragmentation of Production: Is There a Link?

39 Pages Posted: 20 May 2015

See all articles by Isabella Cingolani

Isabella Cingolani

Polytechnic University of Milan

Giulia Felice

Universidad Carlos III de Madrid

Lucia Tajoli

Politecnico di Milano - Dipartimento di Ingegneria Gestionale

Date Written: April 2015

Abstract

In this paper we assess whether the expansion of international fragmentation of production (IFP) and the creation of production linkages among European countries contribute to the trade imbalances registered within the European Union (EU) area in the past decade. Exporting intermediate and semi-finished goods and re-importing finished and assembled goods can give rise to a trade deficit but such international reorganization of production allows countries to improve their efficiency and competitiveness (both in terms of cost reduction and higher quality of goods) and to gain access to new export markets. The net effect on the trade balances is therefore ambiguous.

We test empirically the sign of this effect, using the recently released WIOD database on international production linkages. We find that the current account in EU countries worsens the higher the off-shoring to low-income partners. By contrast, the current account improves by off-shoring to high-income partners. This asymmetry suggests that when countries off-shore to high-income partners the gains in competitiveness overcome the potentially negative effect of importing intermediate inputs.

Keywords: trade balances, off-shoring, European Union

JEL Classification: F14, F15, F62

Suggested Citation

Cingolani, Isabella and Felice, Giulia and Tajoli, Lucia, External Imbalances in the European Union and International Fragmentation of Production: Is There a Link? (April 2015). Centro Studi Luca d'Agliano Development Studies Working Paper No. 386, Available at SSRN: https://ssrn.com/abstract=2608044 or http://dx.doi.org/10.2139/ssrn.2608044

Isabella Cingolani

Polytechnic University of Milan ( email )

Piazza leonardo da Vinci, 32
Milano, Milano 20133
Italy

Giulia Felice (Contact Author)

Universidad Carlos III de Madrid

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Lucia Tajoli

Politecnico di Milano - Dipartimento di Ingegneria Gestionale ( email )

via Lambruschini 4b
Milan, 20156
Italy
++390223992752 (Phone)

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