Technology, Trade Costs, and the Pattern of Trade with Multi-Stage Production

Comparative advantage and trade costs shape the geography of cross-border supply chains and trade flows. To quantify these forces, we build a model of trade with sequential, multi-stage production that features technology differences both across and within individual production stages. We estimate technology and trade costs in the model via simulated method of moments, matching bilateral shipments of final and intermediate goods for sixteen countries. We then apply the estimated model in a series of counterfactual experiments. For example, we show that changes in the level of trade costs generate concentration in gross relative to value-added trade, and that technological improvements in one country induce changes in regional supply chains. Surprisingly however, multi-stage production does not substantially inflate the gravity distance elasticity of trade. ∗Dartmouth College and NBER. E-mail: [email protected]. †Dartmouth College. E-mail: [email protected].