On some effects of international fragmentation of production on comparative advantages, trade flows and the income of countries

It was the overall aim of this paper to highlight some of the implications of international production networks (or international fragmentation of production) on the relevance of comparative advantages, on some of their measures, on the determinants of economic activity. First, we emphasised that vertical, international disintegration of production processes necessarily blurs the concepts of comparative advantage as we know it and leads to a lessening of its power in explaining both merchandise composition and directions of trade; on the other hand, the concept of absolute advantage becomes increasingly relevant, as trade in intermediates grows at the world level. The basic reason for this result is that with trade in intermediates the factor content of traded final goods is no longer solely determined by autarkic relative factor endowments (in the Heckscher-Ohlin class of models), nor by autarkic relative productivities (as in the Ricardian class of models). Second, we have shown that with international fragmentation of production traditional measures of revealed comparative advantages may be misleading. These measures are still useful under the condition that the overall trade flows are properly disaggregated by reason of exchange. Data on trade in intermediates are useful in that they can offer a measure of the degree of production integration of any given domestic industry within the international production network: the upshot is that integration should no longer be thought of as simple trade integration, as we are accustomed to think of it. Third, we moved on to estimate a simple model of aggregate demand accounting for international trade in intermediates: our estimates show that the participationto this form of international division of labour can significantly affect the level of economic activity of a country above and beyond effects due to more traditional forms of international economic integration. More precisely, inward processing traffic appears to be a powerful contribution to GDP growth in ways other than those followed by ‘traditional’ exports of final goods. Thus our results show that international fragmentation of production changes the way we should look at international trade patterns irreversibly.