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Trade Diversion and Production Sharing

Author

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  • Sven W. Arndt

    (Lowe Institute of Political Economy, Claremont McKenna College)

Abstract

This paper examines the repercussions of cross-border production sharing for the welfare effects of preferential trade liberalization. In a general-equilibrium context, a free trade agreement (FTA), which incorporates production sharing, raises the likelihood of welfare improvement. Thus, two members of a free trade area, who each have comparative disadvantage in the production of a final product relative to a non-member, may nevertheless enjoy net trade creation if they jointly possess comparative advantage in key components of that product. At a minimum, crossborder production sharing reduces the trade-diverting elements of an FTA. It follows, that rules of origin, viewed as constraints on cross-border fragmentation, augment the negative, trade-diverting elements of free trade areas.

Suggested Citation

  • Sven W. Arndt, 2004. "Trade Diversion and Production Sharing," Working Papers 0401, Lowe Institute of Political Economy.
    • Handle: RePEc:loi:wpaper:0401
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    File URL: http://lowe.claremontmckenna.edu/pdf/WP04-01.pdf
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    More about this item

    Keywords

    Trade Diversion; Free Trade Areas; Fragmentation; Production Networks;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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