Proximity and Production Fragmentation

Cross-border production chains tend to be local in scope. This suggests that changes in fragmentation over time should be largest among nearby trading partners, and thus may be serving to localize gross trade. Using data on gross and value added trade from 1970-2009, we present three results on the role of proximity in explaining fragmentation: (1) value added to export ratios are lower and are falling more rapidly over time within geographic regions than between them; (2) gross trade travels shorter distances from source to destination than trade in value added, and this gap is growing over time; (3) bilateral value added to export ratios have fallen most among nearby trading partners.