JEL code: F1 _____________________________________________________________________________ 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% of world exports, and has grown as much as 40% 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. ______________________________________________________________________________ This paper is a revision and extension of "The Growth of World Trade" by Ishii and Yi (1997). Since then, the authors have benefited from comments by 4 Tariffs on manufactured goods have fallen by about 15 percentage points, and according to Hummels (1998aHummels ( , 1998b, transportation costs have fallen little over the last thirty-five years. 5 That is, the production possibilities frontier must be relatively flat for a small trade barrier reduction to induce a large trade volume change. A simple back-of-the-envelope calculation shows why. Tariffs and transportation costs have fallen by less than ½ of 1 percentage point per year. On the other hand trade/GDP has grown by over 2.5% per year. This suggests elasticities of substitution of 5 and higher are needed to rationalize trade barrier reduction with trade growth. See Baier and Bergstrand (1997) for more careful elasticity estimates, and Yi (1999) for a calibration of trade growth with and without vertical specialization. 6 We do not count border-crossings that are merely in transit shipments, e.g., Chinese goods going through Hong Kong's ports on their way to the U.S. 10 Development economists have used (3), which they also call the import content of exports. See for example, Chenery, Syrquin, and Robinson (1987). However, their interest was traditionally with balance of payment issues, not the extent of vertical specialization, or its implications for trade growth and gains from trade.

No abstract

No abstract

No abstract

trade, and production across countries. We find that 20-30% of the decline in U.S. and EU final demand was borne by foreign countries, with NAFTA