Determinants of Trade in Parts and Components

There is a broad agreement that growth in world trade has outpaced the growth in global output in recent decades but the key aspect in global trade is production fragmentation. The production process has been split in an increasing number of micro-processes that rises the interaction between the different members internationally, giving rise to a sharp increase in global trade.

The question is, What factors determine trade in parts and components? This is the focus of a recent study.

Theoretically, each stage of the production process should be allocated following the comparative advantage of each country.

Empirically, the author selected parts and components trade data for 26 countries and from 1990 to 2010. From their regression results, they found that trade of parts and components are positively and significantly related to the size of the economy as well as the quality of labour. Second, infrastructure and institutional qualities matter. Third, trade in parts and components are at least somewhat different from trade in all goods. Trade in parts and components are much more sensitive to the quality of labour. In addition, the extent of the production network is responsive to a narrower subsets of measures of quality of infrastructure/institutions.

Once again human capital and institutions are the key to trade and output growth.