DP10932 Trade in parts and components across Europe

Author(s): Richard Frensch, Jan Hanousek, Evzen Kocenda
Publication Date: November 2015
Keyword(s): European Union, gravity model, international trade, panel data, production networks
JEL(s): C23, F14, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10932

Using the factor-proportion based gravity framework we identify driving forces for trade in parts and components. We test our model empirically by using a detailed and large data set of European trade in parts and components of capital goods and show that such trade between East and West Europe is driven by relative supply-side country differences, compatible with models of incomplete specialization and trade. We take our results as evidence for the existence of international East-West production networks in Europe, driven by trade-offs between wages and coordination costs. Our results also reveal that in response to stronger relative wage differences trade in parts and components across Europe is predominantly realized along the extensive margin.