June 22, 1998


The article Vertical Specialization and the Changing Nature of World Trade appears in the latest edition of the New York Fed's Economic Policy Review.

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.

Contact: Douglas Tillett