Specialization and Gains from Trade

SUPER-SPECIALIZATION AND THE GAINS FROM TRADE

SVEN W. ARNDT*

An important facet of "globalization" is the spread of cross-border production,

which is variously known as intra-product specialization, super-specialization, or

production fragmentation. This advanced stage in the international division of labor

works particularly well between high-wage developed and low-wage emerging

economies. But it is precisely this context in which the practice has been criticized for

destroying jobs and undermining wages.

This paper examines the welfare implications of this type of specialization on the

part of labor-intensive, import-competing industries in advanced countries. The

results will surprise the skeptics, for when import-competing industries abandon

production of labor-intensive components, wages rise and industry employment and

output expand. National welfare increases, For a large country, the terms of trade

improve, raising national welfare still further. (JEL F11, F23)

I. INTRODUCTION

Around the globe, countries are being drawn

ever more fully into the international trading

system. In part, this merely reflects processes

that have been underway for many years, but

there are elements in the current phase of

"globalization" that differentiate it from past

episodes. One of those is the growing

importance of what used to be called offshore

sourcing, but is also known as intraproduct

specialization, super-specialization, or

production fragmentation.

1

This paper examines the effect of super-spe-

cialization on wages, employment, output, and

national welfare. The findings will be surpris ing

to many, for intra-product specialization on the

part of import-competing, labor-intensive sectors

in high-wage countries increases industry

employment and output, raises wages, and

advances national welfare. If it generates terms

*This is a revised version of a paper presented at the

Western Economic Association International 72nd Annual

Conference, Seattle, Wash., July 1997. Helpful discussions with

Henryk Kierzkowski and comments from participants at the

Claremont workshop on "Globalization," at the University of

Basel and from anonymous referees are grate fully acknowledged.

Arndt: C. M. Stone Professor of Money, Credit and Trade and

Director, The Lowe Institute of Political Economy,

Claremont McKenna College, Phone 1 -909-621-8012, Fax

1-909-607-8008, E-mail lowe@mckenna.edu

1. Fragmentation is the term used by Jones and

Kierzkowski (1997).

Contemporary Economic Policy

(ISSN 1074-3529)

Vol. XVI, October 1998, 480-485

of trade changes, those are welfare-enhancing as

well.

II. SPECIALIZATION BEYOND FINISHED

PRODUCTS

The focus in this section is on offshore

sourcing by the import -competing industry of an

advanced country. The framework is the

Heckscher-Ohlin (H-O) model. The ini tial con-

ditions are featured in Figure 1, with X0 and Y 0

representing the unit -value isoquants for final

goods X and Y. The wage-rental ratio is (w/r). In

an H-O setting, the high-wage country exports

the capital- intensive commodity Y and imports

labor-intensive X.

Production of commodity X is assumed to

consist of two phases involving two distinct

components, x, and x 2, whose expansion paths

are represented in Figure I by rays Ox, and Ox2,

respectively. Activity x 1 is not only the more

capital-intensive of the two but is more capital-

intensive than the product as a whole. The factor

proportion of overall production at point F is

obtained by vector addition and represents a

weighted average of the factor proportions of the

component activities. Production of X0 units of

the finished product thus requires amounts of x 1

and x2 given by isoquants (not drawn) at points

G and H, respectively.

Starting with a situation involving trade in

finished goods only, we ask what would hap-

480

© Western Economic Association InternationalARNDT: SUPER-SPECIALIZATION AND THE GAINS FROM TRADE

FIGURE 1

pen if reductions in coordination