Edited by Daisuke Hiratsuka and Yoko Uchida
Chapter 2: Vertical Specialization: Some Evidence from East Asia from 1975 to 2000
David Hummels and Yoko Uchida INTRODUCTION 2.1 In recent years, economists have focused on the importance of intermediate input trade and production fragmentation in explaining a wide range of facts about trade, including: the growth in world trade; magnification of trade cost shocks; the effect of trade on wages; and productivity growth within firms. International fragmentation of production and the resulting intermediate input trade is not a new phenomenon (Jones et al., 2005, dating back to the early 1960s), but it is widely perceived that its magnitude and impact have grown substantially in recent decades. There are many excellent theoretical papers exploring the causes and consequences of input trade, beginning with Sanyal and Jones (1982) and Ethier (1982), and continuing with Jones and Kierzkowski (1990), Deardorff (2001), Arndt and Kierzkowski (2001) and Yi (2003). However, empirical work has lagged behind theory due to difficulties with data. The literature contains three basic approaches to studying input trade. The first approach (see Ng and Yeats, 1998, 1999, 2003 for examples) classifies particular products as intermediates or final goods using product definitions.1 The advantage of this approach is that it maximizes geographic and time-series coverage. The disadvantages are two-fold. First, it is not possible to determine which industries in the importing country are using the input and therefore not possible to determine the effects it has, industry by industry, on wages, productivity and so on. Second, any such division between intermediate and non-intermediate goods is arbitrary. The second approach relies on firm-level data...
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