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Trade Diversion and Production Sharing

Journal of Economic Assymetries, Vol. 1, No. 1, 2004

14 Pages Posted: 4 May 2004  

Sven W. Arndt

Claremont McKenna College - Robert Day School of Economics and Finance

Abstract

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.

Keywords: Trade diversion, free trade areas, fragmentation, production networks

JEL Classification: F11, F13, F15

Suggested Citation

Arndt, Sven W., Trade Diversion and Production Sharing. Journal of Economic Assymetries, Vol. 1, No. 1, 2004. Available at SSRN: https://ssrn.com/abstract=532663

Sven W. Arndt (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

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