Vertical specialization in the EU and the causality of trade

ABSTRACT

We use a novel classification scheme to identify three stages of production in the manufacturing sector: parts, components and final goods. In particular, we offer evidence on the revealed comparative advantage of the EU-27 countries concerning the three vertically separated stages of production. Moreover, we investigate whether, and if so how, imports of parts, and components can work as a predictor for the exports of final goods. We find that countries specialize at different stages of production, and that components are Granger causal for the export of final goods in many countries with a lag of 3 months.

KEYWORDS:

• Causality
• vertical production process
• trade in parts and components
• revealed comparative advantage

JEL CLASSIFICATION:

• F10
• O52

Acknowledgements

The authors would like to thank the Institute for East and Eastern European Studies in Regensburg (IOS) for sharing their data with us. In particular, we are grateful to Richard Frensch, Volkhart Vincentz as well as all IOS-seminar participants for helpful comments and suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We refer to Guerrieri and Vergara Caffarelli (2012) for an overview how the international fragmentation of production has developed.

² Parts contains commodities like electronic instruments, mechanical seals, sewing machine needles with single flat shank and spinning rings. The intermediate class components contain commodities such as engines and motors, air conditioning machines, temperature regulators or articulated shafts. Final goods classify manufacturing commodities such as gas turbines, digger, lifts or mobile cranes. For some further examples of the categorization, we refer to table A.1 in the appendix.

³ It is defined by , where denotes the exports or imports in good class of the declaring country .