International Trade Case Study

Two approaches have been adopted to assess the new pattern of trade that called trade in parts and components or international fragmentation of production: traditional theories of international trade approach and the studies outside these theories. The traditional theories of foreign trade approach focused on explaining trade in parts and components under Ricardian (factor productivities) and Heckscher–Ohlin (factor prices and factor intensities) framework according to comparative advantage. Jones and Kierzkowski (1990, 2001), Deardoff (2001) and Turkcan (2011) focused on technological difference for inputs across countries, leading to the specialisation of each country in production part of the good or service according to comparative advantage …show more content…
Therefore, trade in parts and components may help to equalise the prices of the factor in the long run (Deardoff, 2001). Many of the studies attributed increase in trade in parts and components to increase returns and advantage of specialisation of parts which encourage the firms to shift to disintegration production, in addition to increasing in service link and decreasing in its cost. Arndt (2001) and Yi (2003) construct a theoretical model on role of foreign trade policies within the effects of tariff reduction on offshoring process and trade. Yi (2003) explores how fragmentation is not benefiting without tariff reduction; he focuses on imported goods from parts and components that are used to produce export goods and the role of increase in the stages of production of the goods to five or six stages in increasing technology transfer compared with two or three stages. This means that the increase in fragmentation of production can help to increase the technology used in the different stages of …show more content…
Then the agglomerates of industries in one place besides increasing the direction of trade liberalisation will increase the return of various factors of production in one country (for example in many countries in East Asia). We can say there is relation between fragmentation and geographical concentration in order to reduce the cost of production. Also, fragmentation attends to agglomeration in one place to decrease total production cost in case of the increase of service link cost; we can see such type in a country like Malaysia which concentrates the production of electrical machinery in one place in the country (Kimura, 2006). There are lot of studies on new generation of theoretical models of trade in parts and components (international fragmentation). First, there is the property rights approach which has been attend by Antras (2003), Grossman et al. (2005), and Feenstra and Hanson (2005). They explain that integration of production can decrease or remove a lot of problem like breakdown and suppliers ex-post bargaining, hence the concentration will be on investments. Another approach is transaction cost: this theory is the most common to explain the phenomenon of fragmentation depending on the relation between economic exchanges of goods and