Trade in intermediates: Accounting for the spatial structure of outsourcing countries in a geographical system

One of the distinctive characteristics of the current globalization process is the emergence of global value chains. Within global value chains and international production networks, not only are final goods traded internationally, but also intermediate goods (parts, components, and semi-finished goods) and services. Exports of final goods are no longer an appropriate indicator of the competitiveness of countries, as following the emergence of global value chains, final goods increasingly include a large proportion of intermediate goods that have been imported into the country. This trend greatly alters the economic relationships between countries and casts increasing doubt on empirical indicators such as trade and FDI, which are traditionally used to measure globalization.

Countries are viewed as competing with each other for interaction. The competing destinations gravity model represents a step forward in the recognition of interdependencies in spatial choice. Thus, we account for the spatial structure of outsourcing countries in a geographical system. We derive a gravity equation from the classical spatial supply problem in which firms purchase some of their inputs from other firms paying the required transport costs. We also allow for different levels of productivity of the firms and build a gravity equation from entropy maximization. Even if the gravity equations look similar, we show that their underlying structures are different. We find for the gravity equation derived from the probabilistic input demand function that outsourcing is carried out mostly because of factor cost differentials and technological differences, but that distance and the gravity of other countries adversely affect trade in intermediate goods and services.