Trade Verticality and Structural Change in Industries:TheCasesofTaiwanandSouthKorea

This paper documents that a significant portion of trade for Taiwan and Korea follows the trend of world trade in moving toward a pattern of vertical specialization (VS). Noteworthy is the manufacturing sector, whose VS shares of exports has been steadily increasing and has accounted for more than 90% of the total VS shares of manufactured exports. For Taiwan, nearly 57% of the growth in exports is contributed by the growth in VS-based trade; for Korea, it is as high as 64%. In the analysis, we compare VS shares of exports with or without inputoutput circulation among domestic industries in an open economy. Using Taiwan as a case study, we further discuss the implications of trade liberalization through tariff reductions for trade verticality. The last two decades have witnessed a significant portion of world trade moving towards a pattern of “vertical specialization’’ or “global production sharing’’ in which trading countries share different stages of manufacturing (see, e.g., Krugman, 1995; Yeats, 1998; Feenstra, 1998; Hummels et al., 2001; Yi, 2003). Meanwhile, trade liberalization that lowers tariffs and technological improvements in transportation that reduce transaction costs have contributed to the growth of world trade, on the one hand, and have modified the pattern of international production and trade toward vertical specialization, on the other. The economies of outward-oriented countries are deeply integrated through international trade with the rest of the world. Also, production activities are increasingly disintegrated or fragmented in that they involve sequential connections of production stages from one to another with each of trading countries specializing in certain stages of production in a vertical relationship. Vertical specialization in trade arises when the production of an exportable good requires imported intermediate inputs. This type of vertically connected production process involves two or more stages. The seminal work of