Essay About Part Of Labor-Intensive And Important Facet

Specialization and Gains from Trade
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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.
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 [email protected]
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-
© Western Economic Association InternationalARNDT: SUPER-SPECIALIZATION AND THE GAINS FROM TRADE
FIGURE 1
pen if reductions in coordination