The Effects of International Fragmentation of Production on Trade Patterns: An Empirical Assessment

Does fragmentation of production affect the trade patterns of different countries in similar ways? In contrast to current theories of vertical specialization, attempts to provide empirical evidence on this question have been based, in the vast majority of cases, only on a statistical analysis of trade flows. I propose a general equilibrium model of trade and fragmentation that allows me to capture the effects of vertical specialization on the export performances of different countries in individual sectors. It is a comprehensive framework, which combines comparative advantages (both of the Ricardian and Heckscher-Ohlin type) with other characteristics of the economies (sizes, market structure, investments in R&D) and takes into consideration the role of the employment of domestic and imported intermediates in the production of exported and non-exported final goods. The model is used to explain the differences in French and Japanese exports of manufactured goods (relative to US) toward other OECD countries over the period 1980-1994. In particular, the model highlights the propensity of France to vertically specialize its activities in order to fill possible gaps in terms of innovation and TFP, while the negative impact of fragmentation on Japanese exports shows a disinclination to use imported intermediates in the production of the exported goods.