Integration through Intermediate Goods: A Comparison of G-7 Openness to Developing Country Exports

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The fragmentation of manufacturing in G7 economies has substantially altered the way in which developing countries participate in world trade and production. Commodity chains and intertwined production networks have become increasingly important as vectors for the diffusion of technology and integration of developing countries into the world economy. We establish a set of simple and transparent benchmarks to compare and contrast the speed and extent to which production networks have integrated each of the G7 with developing economies through the importation of intermediate goods and examine these comparative indicators of G7 integration at both regional and global levels. We examine both total and intermediate goods trade flows and calculate the income-expenditure elasticity of developing-country sourced imports with respect to G7 incomes and also the elasticity of imported intermediate goods with respect to manufactured output. Within the G7, we find three tiers of openness to intermediate goods produced by developing countries, led by Germany and the US. Regional integration exhibits a clear pattern in which Central Europe appears to be integrating with developed Europe, Mexico with North America, and only East Asia is simultaneously integrating with North America, Europe and Japan.