Vertical Specialization in the EU and the Causality of Trade

What is it about?

We use a novel classification scheme to identify three stages of production in the manufacturing sector: parts, components, and final goods. In particular, we offer evidence on the revealed comparative advantage of the EU-27 countries concerning the three vertically separated stages of production. Moreover, we investigate whether, and if so how, imports of parts, and components can work as a predictor for the exports of final goods. We find that countries specialize at different stages of production, and that components are Granger causal for the export of final goods in many countries with a lag of 3 month.

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Why is it important?

• We use a novel trade categorization scheme that captures the vertical production process. • We distinguish three types of goods: parts, components, and final goods. • We find imports of components to be Granger causal for exports of final goods for countries with a comparative advantage in final goods. • Our results indicate that the assembling of final goods takes about three months