Trade Diversion and Production Sharing

Sven Arndt ()
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Sven Arndt: Lowe Institute of Political Economy, Claremont McKenna College

No 401, Working Papers from Lowe Institute of Political Economy

Abstract: This paper examines the repercussions of cross-border production sharing for the welfare effects of preferential trade liberalization. In a general-equilibrium context, a free trade agreement (FTA), which incorporates production sharing, raises the likelihood of welfare improvement. Thus, two members of a free trade area, who each have comparative disadvantage in the production of a final product relative to a non-member, may nevertheless enjoy net trade creation if they jointly possess comparative advantage in key components of that product. At a minimum, crossborder production sharing reduces the trade-diverting elements of an FTA. It follows, that rules of origin, viewed as constraints on cross-border fragmentation, augment the negative, trade-diverting elements of free trade areas.

Keywords: Trade Diversion; Free Trade Areas; Fragmentation; Production Networks (search for similar items in EconPapers)
JEL-codes: F11 F13 F15 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2004
New Economics Papers: this item is included in nep-int
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Published in Journal of Economic Asymmetries, v.1 no.1 2004, pages 19-32.

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Persistent link: https://EconPapers.repec.org/RePEc:loi:wpaper:0401

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