Munich Personal RePEc Archive

Trade in value-added and the welfare gains of international fragmentation

NJIKE, ARNOLD (2020): Trade in value-added and the welfare gains of international fragmentation.

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Abstract

In order to take profit from the differences in factor endowments and technology that exist between countries, firms delocalize or externalize a share of their goods’ production process to other countries. This phenomenon is so widespread today that very few manufactured goods are produced entirely within the borders of a single country. We examine in this paper the macroeconomic gains related to this phenomenon by calculating the net share of international fragmentation in the welfare gains of trade. To do so, we propose a model that allows us to identify all the components related to international fragmentation in these welfare gains, something that most of the classical trade models fail to do. We show that the net share of international fragmentation in the welfare gains of trade represents on average 22% of the gains of trade, a way lower figure than the share that could be inferred from standard trade models. The shutdown of international fragmentation would, therefore, only reduce the average real wage by 3%.

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