Economy and trade costs

Economy and trade costs

Economy and trade costs

Recent economic literature has also looked at the impact of

falling (trade costs) on the location of production, focusing on

the location of different production stages. In particular, this

strand of literature predicts that a reduction in trade costs leads

to greater fragmentation of production, with firms spreading the

different stages of their production process to different locations.

In other words, it may be more profitable to import components

from different places for final assembly rather than concentrating

production in one country.

Trade costs are only one factor determining the decision to

fragment production. The likelihood of offshoring (moving

part of production to a foreign country) is higher in the case of

standardised tasks where little investment in training and quality

control is needed. In addition, countries with a good institutional

framework, good quality infrastructure and flexible administration

(for example, short times to cross the border or to set up a business)

are more likely to attract foreign firms looking to offshore.