Production Networks and Patterns of Trade: Evidence from Taiwan

This paper investigates the role of production networks in determining the pattern of international trade. Using Taiwan's trade data for 1991, production networks are found to have a discernible impact on the pattern of trade, aside from the variables typically envisaged by conventional and new trade theories, including factor proportions and technological difference. Taiwan's industries are shown to be relatively strong in horizontal networks, but weak in vertical ones. However, the strength in horizontal networks can be undermined by high wages, and the weakness in vertical networks can be strengthened by high R&D intensities. Both networks are conducive to intra-industry trade, which means that networks are useful devices for product differentiation.