Product fragmentation and trade patterns in East Asia

Abstract

International product fragmentation—the cross-border dispersion of component production/assembly within vertically integrated production processes—is an important feature of the deepening structural interdependence of the world economy. This paper examines the implications of this phenomenon for global and regional trade patterns, with special emphasis on countries in East Asia, using a new data set culled from the UN trade database. It is found that, while ‘fragmentation trade’ has generally grown faster than total world trade in manufacturing, the degree of dependence of East Asia on this new form of international specialisation is proportionately larger compared to North America and Europe. The upshot is that international product fragmentation has made the East Asian growth dynamism increasingly reliant on extra-regional trade, strengthening the case for a global, rather than a regional, approach to trade and investment policymaking.