《Interacting factor endowments and trade costs》.pdf

Interacting factor endowments and trade costs: a multi-country, multi-good approach to trade theory James R. Markusen University of Colorado, Boulder Anthony J. Venables London School of Economics Abstract Classic trade questions are reconsidered by generalizing a factor-proportions model to multiple countries, multiple goods or multi-stage production, and country-specific trade costs. The focus is on the interaction between a country’s relative endowment and its trade cost in determining its production specialization, trade volume, factor prices, and welfare. We begin with a symmetric three-good case, comparing trade to autarky. Trade costs play a particularly interesting role for countries with endowments near the world average. Then we consider trade in a two-good case and allow one good to fragment into two stages. Production specialization and the volume of trade are higher with fragmentation for most countries but interestingly, for a large block of countries, these variables fall following fragmentation. Countries with moderate trade costs engage in market-oriented assembly, while those with lower trade costs engage in export- platform production. These two cases correspond to the concepts of horizontal and vertical affiliate production in the literature on multinational enterprises. Increases in specialization and the volume of trade accelerate as trade costs go to zero with and without fragmentation. this version: December 27th , 2005 This paper has mutated a number of times, due in part to very helpful comments and suggestions made at a number of presentations. The authors thank participants at conferences and workshops in Hydra Greece, Trinity