Taking Account

New BEA paper on vertical goods, which in turn are inputs direct investment, allowing specialization trade to final consumption goods. All firms to offshore while keeping Manufacturing trade and verti­ three types of goods may be production within the firms. cal specialization trade, which traded but face transportation Trade among affiliated firms can be defined as trade in goods costs and tariffs. Specifically, the within multinationals has also that incorporate imported in-simulations were run using data been an important source of puts, have both grown rapidly on freight costs and tariffs. trade growth. However, the since the 1960s. In a recent In Bridgman's model, falling strength of the paper's results working paper, Benjamin Bridg­ trade costs, mainly tariffs, ex-suggests that trade costs would man, an economist at the Bu­ plain much of the observed remain a significant source of reau of Economic Analysis growth in overall trade and ver­ the rise in vertical specialization (BEA), examined historical pat-tical specialization trade. Manu-and manufacturing trade even if terns of such trade and found facturing trade grew twice as fast other sources were considered. that in both cases, declining as overall trade. Trade costs have Accounting for the increase in trade costs were important ex-fallen more for manufactured vertical specialization trade is planations of growth. goods over the last 40 years lead-important because there have Bridgman also suggests that ing to a rapid expansion of man-been concerns that offshoring the rise of manufacturing and ufactured parts trade relative to has led to overestimation of pro-vertical specialization trade were materials. The paper suggests ductivity growth by under-related. Both were driven by fall-that the rise of offshoring of counting imports. ing costs of trading manufac­ manufactured parts was due in Determining the degree to tured parts. large part to reduced tariffs. which imports and output are The 1960s coincided with the Vertical specialization trade mismeasured is important in implementation of the Kennedy also grew rapidly, doubling from this regard. In vertical specializa-Round of the General Agree­ 1972 to 1997. The share of trade tion trade, a portion of exports ment on Trade and Tariffs of intermediate goods, however, consists of imported inputs. If (GATT) and other trade deals, did not increase. Rather, the these imported inputs are not such as the U.S.-Canada Auto composition changed. Interme­ properly accounted for, net ex-Pact. Before these agreements, diate goods trade shifted from ports (and national output) will tariffs …