Vertical specialization-based production and intraindustry trade

This paper investigates industry and country-level determinants of intraindustry trade (IIT) between the United States and seventy-two trading partners. Its primary focus is on the relationship between vertical specialization-based production and IIT. Industries engaged in vertical specialization across national boundaries are identified through their use of Offshore Assembly Provisions (OAPs) in the U.S. tariff code. OAPs encourage firms to transfer one or more production stages abroad, export components for assembly, and subsequently import more advanced stages of the product. Three indicators of vertical specialization-based production are found to exert significant positive influences on IIT. Industries that engage in this pattern of production contribute to IIT because resulting two-way trade flows often fall under the same industry classification. Other findings support predictions of modern trade theories.