Fragmentation and Gains from Trade


In this paper, we estimate the competitiveness of countries in intermediate goods and in final goods. We find that China’s competitiveness in both intermediate goods and final goods increased exceptionally rapidly during 1995—2011. We also find that the gains from trade of countries with strong comparative advantage in final goods can be substantially under-estimated if we do not separately take into account trade flows in intermediate goods and final goods. We also find that, during 1995—2011, the average increase in gains from intermediate goods trade across all countries in our sample is distinctly higher than the average increase in gains from final goods trade. This suggest that gains from trade due to international fragmentation of productions is becoming more important over time relative to gains from trade in final goods.

Report No.: HIAS-E-76
Author(s): Edwin L.-C. LAI(a)
Han (Steffan) QI(b)
Affiliation: (a) Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
(b) Department of Economics, Hong Kong Baptist University, Kowloon Tong, Kowloon, Hong Kong
Issued Date: October 2018
Keywords: fragmentation, gains in trade, global value chain, global sourcing
JEL: F10, F11, F14, F17