Edited by Daisuke Hiratsuka and Yoko Uchida
Chapter 5: Japan’s Parts and Components Exports and Complementarity with Foreign Investment
Kazuhiko Yokota INTRODUCTION 5.1 The rapid growth in the volume of world manufacturing trade over the past few decades has long been a source of bafflement among economists because declines in tariffs and transportation costs have been too modest to explain global trade expansion. We seem, however, to be approaching a consensus on the factors that have led to the expansion of world manufacturing trade. Krugman (1995) argues that since World War II, there has been a general trend toward free trade, and he emphasizes the role of unilateral action toward free trade by the developing countries as a source of trade expansion. Feenstra (1998) emphasizes the importance of an increased convergence in economic size, vertical specialization and outsourcing. Some empirical studies, meanwhile, have emphasized trade in parts and components as a cause of growth in world trade. Baier and Bergstrand (2001), for example, indicate that the major elements of trade expansion may come from increased vertical specialization and the outsourcing of intermediate production.1 Taking a more direct approach, Hummels et al. (2001) show the importance of vertical specialization in accounting for the increase in trade. They note that vertical specialization accounted for 21 percent of the exports of ten selected OECD and four selected emerging countries during the latter half of the 1990s. Theoretical contributions such as those by Bergoeing et al. (2004) and Yi (2003) also suggest vertical specialization as a (partial) solution to the puzzle posed by the increase in world trade. Bergoeing et al. (2004) note...
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