Proximity and Production Fragmentation

TLDR

Cross‑border production chains cluster geographically, suggesting that fragmentation increases most among nearby trading partners and localizes gross trade. The authors analyze 1970‑2009 gross and value‑added trade data to test whether geographic proximity drives higher fragmentation and localizes trade. They find that value‑added to export ratios decline faster within regions than between them, gross trade covers shorter distances than value‑added trade with a widening gap, and the steepest bilateral ratio declines occur among nearby partners.

Abstract

Cross-border production chains tend to include geographically proximate countries. This suggests that increases in fragmentation should be largest among nearby trading partners, and thus may serve to localize gross trade. Using data on gross and value added trade from 1970-2009, we present three results supporting this conjecture. First, value added to export ratios are lower and falling more rapidly within geographic regions than between them. Second, gross trade travels shorter distances from source to destination than value added trade, and this gap is growing over time. Third, bilateral value added to export ratios have fallen most among nearby trading partners.