The Nature and Evolution of Vertical Specialisation: What is the Role of Preferential Trade Agreements?

The concurrent international fragmentation of production structures and regionalisation of world trade suggests the need for research into the links between these processes. In this paper we develop a method allowing us to gauge the bilateral element of vertical specialisation and hence make headway into capturing its nature and evolution with particular emphasis on the regional aspect of this phenomenon. We decompose vertical specialisation into backward and forward linkages and find that, on aggregate, the nature of these linkages varies significantly according to the position of a country in the value chain. In addition, we find a statistically significant correlation between these linkages and changes in productivity growth suggesting a possible link between this process and economic growth. Where regionalism is concerned we find marked differences between European, North American and Asian vertical specialisation. Where the former two tend to be more inward oriented, the latter remains highly dependent on European and North American demand.