An Elementary Theory of Global Supply Chains

This paper develops an elementary theory of global supply chains. In spite of its simplicity, our theory is consistent with a number of stylized facts and able to deliver a rich set of predictions regarding how vertical specialization shapes the interdependence of nations. Among other things, our analysis predicts that poor countries have higher shares of primary production and assembly in value added, and provides a novel rationale for why rich countries both tend to trade relatively more with other rich countries and export and import goods with higher unit values. Our analysis also demonstrates that observing a country "moving up the chain"--an observation which is often taken as good news among policy makers--does not necessarily signal an improvement in its relative competitiveness and may very well be associated with a welfare loss. Our results point towards the importance of modeling the sequential nature of production for understanding the consequences of technological changes in developing and developed countries on their trading partners worldwide.

[1]  Moving Up the Value Chain : Staying Competitive in the Global Economy MAIN FINDINGS , 2007 .

[2]  Juan Carlos Hallak,et al.  Product quality and the direction of trade , 2006 .

[3]  Alan V. Deardorff.  International Provision of Trade Services, Trade, and Fragmentation , 1999 .

[4]  Giovanni Maggi,et al.  Diversity and Trade , 1998 .

[5]  Jonathan Eaton,et al.  Technology, Geography, and Trade , 2002 .

[6]  Ana Cećılia Fieler,et al.  Nonhomotheticity and Bilateral Trade: Evidence and a Quantitative Explanation , 2011 .

[7]  M. Ayhan Kose,et al.  International Trade and Business Cycles: Is Vertical Specialization the Missing Link? , 2001 .

[8]  Gordon H. Hanson,et al.  Vertical Production Networks in Multinational Firms , 2003, Review of Economics and Statistics.

[9]  Emily Blanchard,et al.  Trade, Education, and the Shrinking Middle Class , 2013, SSRN Electronic Journal.

[10]  J. Sobel.  How to Count to One Thousand , 1992 .

[11]  R. Vernon.  International investment and international trade in the product cycle , 1966 .

[12]  F. Monte.  Skill Bias, Trade, and Wage Dispersion , 2011 .

[13]  A. Dixit,et al.  Trade and Protection with Multistage Production , 1981 .

[14]  Richard E. Baldwin,et al.  Globalisation: the great unbundling(s) , 2006 .

[15]  E. Rossi-Hansberg,et al.  External Economies and International Trade Redux , 2008 .

[16]  R. Vernon.  International investment and international trade in the product cycle , 1966 .

[17]  J. Bergstrand.  The Heckscher-Ohlin-Samuelson Model, the Linder Hypothesis and the Determinants of Bilateral Intra-industry Trade , 1990 .

[18]  J. Markusen,et al.  Explaining the Volume of Trade: An Eclectic Approach , 1986 .

[19]  J. Mentzer,et al.  Global supply chain risk management strategies , 2008 .

[20]  Arnaud Costinot.  An Elementary Theory of Comparative Advantage , 2009 .

[21]  Alan V. Deardorff.  Fragmentation in Simple Trade Models , 1998 .

[22]  Wilfred J. Ethier.  Higher dimensional issues in trade theory , 1984 .

[23]  Pablo D. Fajgelbaum,et al.  Income Distribution, Product Quality, and International Trade , 2009, Journal of Political Economy.

[24]  Peter J. Klenow,et al.  The Variety and Quality of a Nation's Exports , 2005 .

[25]  M. Kremer,et al.  The O-Ring Theory of Economic Development , 1993 .

[26]  Kiminori Matsuyama,et al.  A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North‐South Trade , 2000, Journal of Political Economy.

[27]  E. Rossi-Hansberg,et al.  Organizations and Trade , 2008 .

[28]  G. Grossman.  The Distribution of Talent and the Pattern and Consequences of International Trade , 2002, Journal of Political Economy.

[29]  Elhanan Helpman,et al.  VERTICAL PRODUCT DIFFERENTIATION AND NORTH-SOUTH TRADE , 1987 .

[30]  Daron Acemoglu,et al.  Incomplete Contracts and the Product Cycle , 2005 .

[31]  Jagdish N. Bhagwati,et al.  Immiserizing Growth: A Geometrical Note , 1958 .

[32]  Kei-Mu Yi.  Can Multi-Stage Production Explain the Home Bias in Trade? , 2008 .

[33]  Juan Carlos Hallak,et al.  A Product-Quality View of the Linder Hypothesis , 2006, The Review of Economics and Statistics.

[34]  Sherwin Rosen,et al.  Authority, Control, and the Distribution of Earnings , 1982 .

[35]  H. Kierzkowski,et al.  The role of services in production and international trade , 1988 .

[36]  Dana Rapoport,et al.  Vertical Specialization and the Changing Nature of World Trade , 1998 .

[37]  Robert E. Lucas,et al.  On the Size Distribution of Business Firms , 1978 .

[38]  Gordon H. Hanson,et al.  Globalization, Outsourcing, and Wage Inequality , 1996 .

[39]  Kei-Mu Yi,et al.  Can the Standard International Business Cycle Model Explain the Relation between Trade and Comovement? , 2005 .

[40]  Elhanan Helpman,et al.  Quality Ladders and Product Cycles , 1989 .

[41]  D. Urban,et al.  Offshoring along the Production Chain , 2009, SSRN Electronic Journal.

[42]  A. Venables,et al.  Relocating the Value Chain: Off-Shoring and Agglomeration in the Global Economy , 2010 .

[43]  Paul Krugman,et al.  A ‘Technology Gap’ Model of International Trade , 1985 .

[44]  Peter K. Schott.  Across-Product Versus Within-Product Specialization in International Trade , 2004 .

[45]  Adam Smith,et al.  The Wealth of Nations , 1999 .

[46]  Jonathan Vogel,et al.  Matching and Inequality in the World Economy , 2009, Journal of Political Economy.

[47]  Nancy L. Stokey.  The Volume and Composition of Trade Between Rich and Poor Countries , 1991 .

[48]  Gordon H. Hanson,et al.  Offshoring and Volatility: Evidence from Mexico's Maquiladora Industry , 2009 .

[49]  S. Yeaple.  A simple model of firm heterogeneity, international trade, and wages , 2005 .

[50]  Luis Garicano,et al.  Hierarchies and the Organization of Knowledge in Production , 2000, Journal of Political Economy.

[51]  R. Jones.  Comparative and Absolute Advantage , 1980 .

[52]  Peter K. Schott,et al.  Estimating Cross-Country Differences in Product Quality , 2008 .

[53]  R. Korzeniewicz,et al.  Globalization and Inequality , 2011 .

[54]  Daniel Trefler,et al.  Sorting It Out: International Trade with Heterogeneous Workers , 2007, Journal of Political Economy.

[55]  David Hummels,et al.  The Nature and Growth of Vertical Specialization in World Trade , 1999 .

[56]  Davin Chor,et al.  Organizing the Global Value Chain , 2012 .

[57]  Kant Rao,et al.  Global Supply Chains: Factors Influencing Outsourcing of Logistics Functions , 1994 .

[58]  Robert C. Johnson,et al.  Accounting for intermediates: Production sharing and trade in value added , 2012 .

[59]  Pol Antras,et al.  Incomplete Contracts and the Product Cycle , 2003 .

[60]  Kei-Mu Yi,et al.  Can Vertical Specialization Explain the Growth of World Trade? , 2000, Journal of Political Economy.

[61]  D. Levine,et al.  Production Chains , 2010 .

[62]  H. Stanley,et al.  On the Size Distribution of Business Firms , 2008 .

[63]  Henryk Kierzkowski,et al.  Globalization and the consequences of international fragmentation , 2001 .

[64]  J. Falkinger,et al.  The distributional effects of international outsourcing in a 2×2 production model , 2003 .

[65]  Nicholas Sly.  Labor Matching Behavior in Open Economies and Trade Adjustment , 2008 .

[66]  Volker Nocke,et al.  An Assignment Theory of Foreign Direct Investment , 2004 .

[67]  Kevin M. Murphy,et al.  Quality and Trade , 1991 .

[68]  Sven W. Arndt.  Globalization and the Open Economy , 1997 .

[69]  L. Tesar,et al.  Trade, production sharing, and the international transmission of business cycles , 2008, Journal of Monetary Economics.

[70]  S. B. Linder,et al.  An essay on trade and transformation , 1964 .

[71]  Kalyan K Sanyal,et al.  Vertical Specialization in a Ricardian Model with a Continuum of Stages of Production , 1983 .