South-South trade: Vertical Division of Labor and Extensive Margin of Trade
South-South trade: The Gravity Puzzle
Two main determinants of the recent dynamism of SSTmust be stressed. First, the vertical specialization of countries (Hummels, Ishii, and Yi 2001) and the associated increasing fragmentation of the production processes translate into large flows of parts and components among developing economies. Vertical specialization accounts for roughly one-third of world trade growth. Such processing trade is well documented in the case of Asia. China, especially, is often used as an export platform, importingandassemblingintermediategoodsproduced by affiliates of foreign firms located elsewhere inAsia.
Second, the diversification of numerous developing economies has led them to compete on a wide spectrum of products with industrialized countries. According to the distinction introduced by Melitz (2003), the recent dynamism has been based on the extensive margin of developing countries’ exports (that is, increasing the number of exported products or destination markets), rather than on the intensive one (exporting increasing values of the same products to the same markets).
Using detailed U.S. import data, Hummels and Klenow (2005) construct measures such that a country’s share in world exports decomposes in an extensive export margin (the fraction of world exports occurring in the product-market categories where a country exports), times an intensive export margin (a country’s share of world markets in the market-categories in which it exports). Though not specifically addressing SST, such a decomposition is very informative. The underlying question is: As a country develops and accumulates resources, howare these resources used? To increase the quantities exported of the existing set of goods? To improve the quality of these goods?Or to expand the set of goods or destination markets? The bottomline is that twothirds of the growth pertains to the extensivemargin, essentially due to a larger number of exported products: Asimple count points to a 62percent increase in their number when the economic size of the exporter doubles.
In 2005 China overtook France and the United States in terms of diversity of exports. Other highly diversified exporters include Korea, Taiwan, India, Turkey, Thailand, Brazil, Mexico, Malaysia, Singapore, Hong Kong, Indonesia, South Africa, United Arab Emirates, Argentina, and the Philippines. In contrast, Ethiopia has simply kept its number of products constant over the period 2000 2005, while Jamaica, Myanmar, El Salvador, Mali, and Coˆte d’Ivoire have recorded declines inthe number of their exported products. Still, the question remains whether recorded SST flows remain too low, given the characteristics of these countries.