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ادسنس العرب
Abstract
We provide a synthetic analysis of the different ways in which countries participate in the world
economy. Classic trade questions are reconsidered by generalizing a factor-proportions model to
multiple countries, multiple goods or multi-stage production, and country-specific trade costs. Each
country’s production specialization, trade and welfare is determined by the interaction between its
relative endowment and its trade costs. Findings include the result that the relationship between
trade volumes and gains from trade is not monotonic. We consider the effects of allowing one good
to ‘ fragment’ into component and assembly production. Some countries engage in these production
stages primarily to serve the domestic market, while others become ‘export platforms’. The volume
of trade and welfare levels are higher with fragmentation for most countries, although for a large
block of countries these variables fall following fragmentation.
this version: February 2nd, 2007
This paper has mutated a number of times, due in part to very helpful comments and suggestions made at
a number of presentations. The authors thank referees and participants at conferences and workshops in
Hydra Greece, Trinity College Dublin, University of New South Wales, University of Sydney, National
University of Singapore, City University of Hong Kong, University of Science and Technology Hong
Kong, Boston College, WIIS Vienna, the University of Copenhagen, the GTAP conference in
Washington and the NBER summer institute.
1
Trade theory tends to be dominated by two-country models while empirical research inevitably
confronts multi-country data. Theoretical analyses which do assume multiple countries often
rely on product differentiation (Armington or monopolistic-competition), free trade, and possibly
factor-price equalization to obtain results. Often the models are not solved for world general
equilibrium, especially outside of the factor-price-equalization set.
While rich insights have certainly been gained from the two-country approach, some
inherent limitations of two-ness rule out many interesting and important questions. A couple of
examples for factor-proportions models are as follows. First, consider a country with the average
world endowment. In a two-country model, the other country has the same endowment by
definition and so a country with the average world endowment is predicted not to trade, which is
surely counter empirical. Second, suppose that there are three goods to be produced. With two
countries, one country must produce at least two of the goods, so some specialization patterns
are ruled out. Both countries cannot be specialized even if they have extreme endowment ratios.
Third, consider trade costs. In a two-country world, there is no meaningful sense in which one
country has low trade costs and the other high trade costs. We could never ask how two
countries with the same factor proportions but different trade costs differ in their production and
trade patterns. A fourth example comes from the theory of multinational firms. A two-country
model will generally not support horizontal and vertical firms simultaneously.
These limitations are the motivation for this paper. The purpose of the paper is to
reconsider a set of classic trade questions where there are multiple countries which differ in
relative endowments and trade costs. Our basic set up is a two-dimensional space of countries,
differing in relative factor endowments and in trade costs, and we characterize the production
2
1 Domestic market oriented assembly and export platform assembly correspond to the notions of
horizontal and vertical investment developed in the literature on multinationals (Markusen 2002).
2 Our results on the relationship between trade volumes, trade costs and fragmentation are
consistent with those of Yi (2003).
and trade of every country in this two dimensional space. We begin by deriving the pattern of
production specialization, trade, and factor prices in a three-good, two-factor context, comparing
trade to autarky for all countries. The model is also an excellent vehicle for considering multistage
production and outsourcing, topics of current interest. Our second exercise is thus to begin
with trade in a two-good model, and then allow the production of one good (X) to fragment into
two stages, components (C) and assembly (A) and assess how countries with different factor
endowments and trade costs react to this new opportunity.
Several results can be highlighted for the three-good model. First, a low-trade-cost
country with the average world endowment may specialize and trade a great deal. Such a
country gains from trade, but those gains are small compared to countries with endowments far
from the world average. Second and closely related, there is not a strong correlation between
trade volumes and gains from trade. This raises questions about attempts such as that of Frankel
and Romer (1999) to empirically quantify gains from trade on the basis of trade volumes.
Turning to fragmentation and outsourcing, we show that some countries engage in
assembly just for the domestic market, while others operate as export platforms for assembled
goods. We thereby provide an integrated treatment of patterns of production that have previously
been studied in quite different models.1 Fragmentation also effects trade volumes and welfare.
While many countries respond to fragmentation with increased trade volumes, for some
countries trade volumes fall2. Turning to welfare, we show that while most countries gain from
3
3 In Anderson and van Wincoop each region produces a single composite good differentiated
from other regions, and they solve for bilateral trade flows in a multi-country world. We go in a more
traditional Heckscher-Ohlin direction with a richer structure for product and factor markets. Countries
specialize in sub-sets of common (homogeneous goods) on the basis of their factor endowment and trade
cost. We do not solve for bilateral flows, but only for each country’s volume and composition of trade.
fragmentation, a set of countries with relative factor abundance close to the factor intensity of
integrated X production lose from fragmentation, a result anticipated by Jones and Kierzkowski
(2001).
1. Related literature
Our paper relates to an extensive range of existing literature, both theoretical and empirical. An
early multi-country approach to factor-proportions trade is found in Leamer (1984) with more
recent developments in a series of papers by Davis and Weinstein which move away from free
trade and factor-price equalization (the empirical implications of trade frictions with many
countries and goods are derived in Davis and Weinstein 2003). Multi-country issues are
addressed explicitly in much of the work on monopolistic competition and on gravity models, for
example Anderson and van Wincoop (2003).3
Analyses of multi-stage production and of fragmentation are given in Jones (2000) and
articles in the edited volume of Arndt and Kierzkowski (2001). Markusen (1989), Venables
(1999), Hanson (1998), and Venables and Limao (2002) consider the issue, and the latter two
papers introduce a multi-country framework and country or region-specific trade costs.
Grossman and Rossi-Hansberg (2006) have several innovations, including a structure in which
each intermediate good or service is used in all industries, so tradeability of one of these “tasks”
directly affects all industries rather than just one. We build upon much of this research, solving
4
for world general equilibrium in the multi-country setting and developing the systematic
relationship between the country-specific characteristics of endowments and trade costs and the
resultant patterns of specialization and trade.
Although we use a competitive model, some results have analogies to the literature on
multinational firms, in particular the distinction between horizontal (market serving) and vertical
(export platform) activities. The horizontal model was developed in Markusen (1984), the
vertical model in Helpman (1984) and Helpman and Krugman (1985), and an integrated
approach is given in Markusen (2002). All of these analyses have the two-country limitation
noted above. We show that, with many countries and trade costs, market serving and export
platform fragmentation can coexist in a perfectly competitive economic environment.
Turning to the empirical literature, the growth of trade in intermediates and vertical
specialization are analyzed by a number of authors including Hummels, Rapoport and Yi (1998),
Yeats (1998), Ng and Yeats (1999), Hummels, Ishii and Yi (2001), and Hanson, Mataloni and
Slaughter (2001, 2002). Yi’s (2003) paper presents an insightful integration of theory and
empirical analysis, but the theory sticks with a two-country case (and thus countries cannot differ
in trade costs). We hope that our paper can contribute to this empirical literature by suggesting
new underlying theoretical relationships with empirical implications.
2. The multi-country model
As noted above, we will work in a world in which there are many countries, differing from each
other in their factor endowments and in their trade costs. The description of each country draws
on standard trade theory ingredients. Each country has fixed endowments of two factors, L and
We provide a synthetic analysis of the different ways in which countries participate in the world
economy. Classic trade questions are reconsidered by generalizing a factor-proportions model to
multiple countries, multiple goods or multi-stage production, and country-specific trade costs. Each
country’s production specialization, trade and welfare is determined by the interaction between its
relative endowment and its trade costs. Findings include the result that the relationship between
trade volumes and gains from trade is not monotonic. We consider the effects of allowing one good
to ‘ fragment’ into component and assembly production. Some countries engage in these production
stages primarily to serve the domestic market, while others become ‘export platforms’. The volume
of trade and welfare levels are higher with fragmentation for most countries, although for a large
block of countries these variables fall following fragmentation.
this version: February 2nd, 2007
This paper has mutated a number of times, due in part to very helpful comments and suggestions made at
a number of presentations. The authors thank referees and participants at conferences and workshops in
Hydra Greece, Trinity College Dublin, University of New South Wales, University of Sydney, National
University of Singapore, City University of Hong Kong, University of Science and Technology Hong
Kong, Boston College, WIIS Vienna, the University of Copenhagen, the GTAP conference in
Washington and the NBER summer institute.
1
Trade theory tends to be dominated by two-country models while empirical research inevitably
confronts multi-country data. Theoretical analyses which do assume multiple countries often
rely on product differentiation (Armington or monopolistic-competition), free trade, and possibly
factor-price equalization to obtain results. Often the models are not solved for world general
equilibrium, especially outside of the factor-price-equalization set.
While rich insights have certainly been gained from the two-country approach, some
inherent limitations of two-ness rule out many interesting and important questions. A couple of
examples for factor-proportions models are as follows. First, consider a country with the average
world endowment. In a two-country model, the other country has the same endowment by
definition and so a country with the average world endowment is predicted not to trade, which is
surely counter empirical. Second, suppose that there are three goods to be produced. With two
countries, one country must produce at least two of the goods, so some specialization patterns
are ruled out. Both countries cannot be specialized even if they have extreme endowment ratios.
Third, consider trade costs. In a two-country world, there is no meaningful sense in which one
country has low trade costs and the other high trade costs. We could never ask how two
countries with the same factor proportions but different trade costs differ in their production and
trade patterns. A fourth example comes from the theory of multinational firms. A two-country
model will generally not support horizontal and vertical firms simultaneously.
These limitations are the motivation for this paper. The purpose of the paper is to
reconsider a set of classic trade questions where there are multiple countries which differ in
relative endowments and trade costs. Our basic set up is a two-dimensional space of countries,
differing in relative factor endowments and in trade costs, and we characterize the production
2
1 Domestic market oriented assembly and export platform assembly correspond to the notions of
horizontal and vertical investment developed in the literature on multinationals (Markusen 2002).
2 Our results on the relationship between trade volumes, trade costs and fragmentation are
consistent with those of Yi (2003).
and trade of every country in this two dimensional space. We begin by deriving the pattern of
production specialization, trade, and factor prices in a three-good, two-factor context, comparing
trade to autarky for all countries. The model is also an excellent vehicle for considering multistage
production and outsourcing, topics of current interest. Our second exercise is thus to begin
with trade in a two-good model, and then allow the production of one good (X) to fragment into
two stages, components (C) and assembly (A) and assess how countries with different factor
endowments and trade costs react to this new opportunity.
Several results can be highlighted for the three-good model. First, a low-trade-cost
country with the average world endowment may specialize and trade a great deal. Such a
country gains from trade, but those gains are small compared to countries with endowments far
from the world average. Second and closely related, there is not a strong correlation between
trade volumes and gains from trade. This raises questions about attempts such as that of Frankel
and Romer (1999) to empirically quantify gains from trade on the basis of trade volumes.
Turning to fragmentation and outsourcing, we show that some countries engage in
assembly just for the domestic market, while others operate as export platforms for assembled
goods. We thereby provide an integrated treatment of patterns of production that have previously
been studied in quite different models.1 Fragmentation also effects trade volumes and welfare.
While many countries respond to fragmentation with increased trade volumes, for some
countries trade volumes fall2. Turning to welfare, we show that while most countries gain from
3
3 In Anderson and van Wincoop each region produces a single composite good differentiated
from other regions, and they solve for bilateral trade flows in a multi-country world. We go in a more
traditional Heckscher-Ohlin direction with a richer structure for product and factor markets. Countries
specialize in sub-sets of common (homogeneous goods) on the basis of their factor endowment and trade
cost. We do not solve for bilateral flows, but only for each country’s volume and composition of trade.
fragmentation, a set of countries with relative factor abundance close to the factor intensity of
integrated X production lose from fragmentation, a result anticipated by Jones and Kierzkowski
(2001).
1. Related literature
Our paper relates to an extensive range of existing literature, both theoretical and empirical. An
early multi-country approach to factor-proportions trade is found in Leamer (1984) with more
recent developments in a series of papers by Davis and Weinstein which move away from free
trade and factor-price equalization (the empirical implications of trade frictions with many
countries and goods are derived in Davis and Weinstein 2003). Multi-country issues are
addressed explicitly in much of the work on monopolistic competition and on gravity models, for
example Anderson and van Wincoop (2003).3
Analyses of multi-stage production and of fragmentation are given in Jones (2000) and
articles in the edited volume of Arndt and Kierzkowski (2001). Markusen (1989), Venables
(1999), Hanson (1998), and Venables and Limao (2002) consider the issue, and the latter two
papers introduce a multi-country framework and country or region-specific trade costs.
Grossman and Rossi-Hansberg (2006) have several innovations, including a structure in which
each intermediate good or service is used in all industries, so tradeability of one of these “tasks”
directly affects all industries rather than just one. We build upon much of this research, solving
4
for world general equilibrium in the multi-country setting and developing the systematic
relationship between the country-specific characteristics of endowments and trade costs and the
resultant patterns of specialization and trade.
Although we use a competitive model, some results have analogies to the literature on
multinational firms, in particular the distinction between horizontal (market serving) and vertical
(export platform) activities. The horizontal model was developed in Markusen (1984), the
vertical model in Helpman (1984) and Helpman and Krugman (1985), and an integrated
approach is given in Markusen (2002). All of these analyses have the two-country limitation
noted above. We show that, with many countries and trade costs, market serving and export
platform fragmentation can coexist in a perfectly competitive economic environment.
Turning to the empirical literature, the growth of trade in intermediates and vertical
specialization are analyzed by a number of authors including Hummels, Rapoport and Yi (1998),
Yeats (1998), Ng and Yeats (1999), Hummels, Ishii and Yi (2001), and Hanson, Mataloni and
Slaughter (2001, 2002). Yi’s (2003) paper presents an insightful integration of theory and
empirical analysis, but the theory sticks with a two-country case (and thus countries cannot differ
in trade costs). We hope that our paper can contribute to this empirical literature by suggesting
new underlying theoretical relationships with empirical implications.
2. The multi-country model
As noted above, we will work in a world in which there are many countries, differing from each
other in their factor endowments and in their trade costs. The description of each country draws
on standard trade theory ingredients. Each country has fixed endowments of two factors, L and
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