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In the article, David Hummels, Dana Rapoport, and Kei-Mu Yi show that vertical specialization in international trade has contributed significantly to the increased global flows of goods and services.
Vertical specialization, according to the authors, occurs when a country uses imported intermediate parts to produce goods it later exports. Countries link sequentially to produce a final good, with each country specializing in a particular stage of the good's production process.
Using four international trade case studies and trade data involving ten industrialized countries, the authors calculate the level and growth of vertical-specialization-based trade.
They conclude that:
Vertical specialization has accounted for a large and increasing share of international trade over the last several decades--that share has been as high as 50 percent in some of the smaller countries examined.
Although tariff and non-tariff barriers worldwide are quite low, vertical specialization can magnify the gains achieved by lowering these barriers even further.
The trends that have led to increased vertical specialization--lower trade barriers and transportation and communications technology enhancements--are likely to continue; consequently, vertical specialization should become even more prevalent in the next century.
David Hummels is an assistant professor of economics at the University of Chicago; Dana Rapoport is an assistant economist and Kei-Mu Yi a senior economist at the New York Fed.