Trends in Fragmentation of Production: A Comparative Study of Asia and Latin America

During the last decade dramatic changes have taken place in the direction and pattern of trade of the emerging economies. Notable amongst them is the thriving trade in rsquo;fragmentation’ also called trade in Parts, Components and Accessories (PCA) wherein the production process is split into two or more steps. This growth in fragmentation trade involves relocating production stages to low cost countries where labour is abundant. In this paper, we examine and compare the trends in PCA exports of 12 emerging economies (9 from Asia and 3 from Latin America) for a period from 1994 to 2009. Empirical evidence suggests that considerable churning has taken place in Asia in exports of PCA as compared to countries in Latin America. For instance, Singapore occupied a leading position in 1994, but vacated it in 2002 which was occupied by Philippines. Further, we examine the share of Electronics and Automotive parts in total PCA exports and find that exports of Electronic parts account for a dominant share of PCA exports in Asia, but that of Automotive parts are a small fraction of the total PCA exports. But on the other hand, although exports of PCA are a small percentage of total exports in the Latin American countries, the production networks in automotive parts are more advanced compared to Asia. We use the Lafay index of specialization to study the changing comparative advantage of countries over time. The Logistic Performance Index and the Foreign Direct Investment inflows can to some extent explain the booming PCA trade. It is against this backdrop that we argue that there is need for a paradigm shift in the trade policies formulated and implemented by the governments. Policies must ensure productivity gains, up gradation of the manufacturing sector, expansion of domestic demand, participation of all segments of the population in income generation and so on.