Fragmentation and vertical intra-industry trade in East Asia

East Asia experienced an unprecedented change in its international trade patterns in the last 10–15 years. To investigate this development, the paper decomposes machinery trade into one-way trade, vertical intra-industry trade (vertical IIT), and horizontal intra-industry trade (horizontal IIT), using finely disaggregated international trade data. Our empirical analysis confirms that the significance of vertical IIT drastically increased, while the relative importance of one-way trade dropped. In addition, our empirical results show no evidence that most vertical IIT conforms to the vertical product differentiation model. Rather, the explosive increase in vertical IIT is largely due to the expansion of back-and-forth transactions in vertically fragmented cross-border production processes. The findings show that vertical international production sharing did become an essential part of each economy in East Asia in the 1990s, particularly with the explosive increase in vertical transactions of machinery parts and components.