Global production sharing and the measurement of price elasticities in international trade

This paper examines the implications of global production sharing for the measurement of price elasticities in international trade using a unique disaggregated dataset relating to US manufacturing imports. It is found that imports of parts and components are remarkably less sensitive to changes in relative prices and, consequently, the sensitivity of aggregate trade flows to relative prices tends to diminish as trade cuts ever more rapidly into the production process. This finding casts doubt on the validity of the conventional approach to trade flow modeling which lumps together parts and components and final goods as a homogeneous product.