Global Production Sharing, Trade Patterns and Determinants of Trade Flows

This paper examines the extent and pattern of global production sharing, focusing on East Asia, and probes its implications for the analysis of the determinants of trade flows. Reflecting rapid global spread of production sharing, trade in parts and components has increased at a much faster rate than total manufacturing trade in recent years and East Asia (both including and excluding Japan) is unique in the world for its heavy reliance on this new form of international exchange. The econometric analysis reveals that parts and components are highly insensitive to changes in relative prices and; as a result, the impact on aggregate trade flows of relative price changes diminishes as its share increases. This implies that exchange rate policy may be less effective in balance of payments adjustment, in countries where component trade is high and growing.