The changing structure of international trade linked to global production systems : what are the policy implications?

The author argues in this paper that the quantitative rise in world trade openness since 1980 may be less significant than the qualitative change in the structure of world trade, specifically the rise in intermediate goods trade resulting form the breaking up of the production process into different parts and locating these parts in different countries. His paper examines the extent of that structural change, its causes, and its implications for theory and policy. The increasing importance of trade in intermediate goods requires a new emphasis in the theories of international trade and investment toward a theory of the competitive struggle of absolute advantage and externalization. The challenge of industrial upgrading in global production systems will require industrial, competititon and labour market policies at the national level aimed at generating the profit and wage growth needed to build skills, knowledge-based assets, infraestructure and demand that in turn gird long-term economic growth. In particular, a delicate balance must be struck between market power for firms needing profits to innovate, and competitive pressure that encourages knowledge- asset creation. He concludes that in past successful cases of industrial upgrading, inward foreign direct investment has not played a leading role and should not be relied on in this sense even with the provision of special incentives.