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Trade-Driven Sectoral Upgrading and the Global Balances

Haiping Zhang ()
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Haiping Zhang: Department of Economics, University of Auckland Business School

No 2, Working Papers from New Zealand Centre of Macroeconomics

Abstract: This paper analyzes how trade integration may affect international financial flows in a world with heterogeneous financial development. In the presence of financial frictions and sector-specific minimum investment requirements, the static gains from trade trigger the cross-sector investment reallocation on the extensive margin, which may allow the more financially developed country (North) to offshore low-return production activities and upgrade to high-return activities. This way, trade-driven sectoral upgrading in North becomes a mechanism through which the substantial decline in trade and communication costs and the resulting boom in supply-chain trade may contribute to the global imbalances in the recent decades.

Keywords: financial frictions; global imbalances; minimum investment requirements; sectoral shifts; supply-chain trade (search for similar items in EconPapers)
JEL-codes: F11 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-opm
Date: 2018
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