Fragmented production: regionalization of trade?

This paper explores the impact of vertical specialization on world trade within the framework of the O-ring theory of production. Within such a framework there is little scope for substituting quantity for quality or for gaining market shares by undercutting established suppliers purely on cost. Furthermore, quality requirements will increase as lead firms in the supply chain invest in technology that reduces inventory and speeds up the production process. It is shown that potential suppliers in low-cost countries will only have an incentive to upgrade quality if adequately efficient infrastructure, logistics and customs procedures are in place. Changing trade patterns between USA and Mexico and China suggests that proximity and low trade barriers are important determinants of the extent and nature of vertical specialization. Thus, a larger share of Mexico's trade with USA is driven by vertical specialization than China's trade with USA. Nevertheless, China has caught up with Mexico as far as share in US total imports is concerned, and the market share gap has narrowed even in electronics, the sector in which vertical specialization is most prominent. It appears that vertical specialization adds to total world trade rather than replacing traditional trade flows.

No: ERSD-2003-01


Hildegunn Kyvik Nordås — WTO

Manuscript date:  August 2003

Key Words

Vertical specialization, China, Mexico, Electronics, Motor vehicles

JEL classification numbers  

F12, F14

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of individual staff members or visiting scholars, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, not the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, rue de Lausanne 154, CH-1211 Genève 21, Switzerland. Please request papers by number and title.

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