Essays in Honor of Mordechai Kreinin
Edited by Michael G. Plummer
Chapter 8: Global Production Networks and Regional Integration
Sven W. Arndt 1. INTRODUCTION Cross-border production sharing is probably one of the more important new elements in trade relations among countries. It occurs with or without the overlay of preferential trade liberalization. An example of the latter is the production networks of Japanese firms in Asia.1 An example of the former is production sharing between Canada, the US, and Mexico in the North American Free Trade Area (NAFTA). Production sharing based on intra-product specialization has been shown to be welfare-enhancing under conditions of free trade, while its effects are ambiguous in the context of a most-favored-nation (MFN) tariff regime.2 This chapter examines the implications of production sharing in the context of preferential trade liberalization. Of particular interest is the case in which a freetrade area which is clearly trade-diverting under traditional circumstances becomes trade-creating with joint production. Trade in components has important implications for the interaction between exchange rates and the trade balance. Trade tends to become less sensitive to exchange-rate changes and trade-balance accounting needs to distinguish between the value of total trade and trade in value-added. When production sharing takes place between advanced and emerging economies, foreign investment flows occur and capacity accumulation typically precedes the onset of joint production. This introduces cycles into the behavior of the real-exchange rate and the current account. The real rate appreciates and the current balance deteriorates during the investment phase of the process, followed by real depreciation and current account improvement. The rest of the chapter is organized as follows....
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