According to the terms-of-trade theory, negotiations over tariffs alone, coupled with an effective market access preservation rule, can bring governments to the efficiency frontier. In this paper, we show that the nature of international price determination is important for this central result of the terms-of-trade theory. While the received theory assumes that international prices are fully disciplined by aggregate market clearing conditions, we show here that support for "shallow" integration is overturned, and instead a need for "deep" integration is suggested ? wherein direct negotiations occur over both border and behind-the-border policies ? if international prices are determined through bargaining.
We propose two distinct approaches to the measurement of industry upstreamness (or average distance from final use) and show that they yield an equivalent measure. Furthermore, we provide two additional interpretations of this measure, one of them related to the concept of forward linkages. We construct this measure for 426 industries using the 2002 US input-output Tables. We also construct our measure using data from selected countries in the OECD STAN database. Finally, we present an application of our measure that explores the determinants of the average upstreamness of exports at the country level using trade flows for 2002.
The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We argue that the rise of offshoring will make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules -- such as market access, reciprocity and non-discrimination -- to solve their trade-related problems. (JEL F12, F13, L24)