The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Regional & Community Outreach connects the Bank to Main Street via structured dialogues and two-way conversations on small business, mortgages, and household credit.
Economic Education improves public knowledge about the Federal Reserve System, monetary policy implementation, and promoting financial stability through the Museum and programs for K-16 students and educators, and the community.
The Nature and Growth of Vertical Specialization in World Trade
March 1999Number 72
JEL classification: F1
Authors: David Hummels, Jun Ishii, and Kei-Mu Yi
Dramatic changes are occurring in the nature of international trade. Production processes increasingly involve a sequential, vertical trading chain stretching across many countries, with each country specializing in particular stages of a good's production sequence. We document a key aspect of these vertical linkagesthe use of imported inputs in producing goods that are exportedwhich we call vertical specialization. Using input-output tables from the OECD and emerging market countries, we estimate that vertical specialization accounts for up to 30percent of world exports and has grown as much as 40percent in the last twenty-five years. The key insight about why vertical specialization has grown so much lies with the fact that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods-in-process cross multiple borders. Hence, even small reductions in tariffs and transport costs can lead to extensive vertical specialization, large trade growth, and large gains from trade. We formally illustrate these points by developing an extension of the Dornbusch-Fischer-Samuelson ricardian trade model.
For a published version of this report, see David Hummels, Jun Ishii, and Kei-Mu Yi, "The Nature and Growth of Vertical Specialization in World Trade," Journal of International Economics 54, no. 1 (June2001): 75-96.