Firms find advantages in sourcing inputs from abroad and in fragmenting their production process. On
average, vertical trade represents about one third of total trade among OECD countries. This report
describes and illustrates new firm strategies of vertical specialisation and explores the policy implications
of new patterns of trade and FDI. It is in services industries that vertical trade has increased the most in
recent years. While vertical trade seems to respond to the same determinants as the rest of exports and
imports, distance-related trade costs play a more important role in explaining the volume of bilateral trade
flows resulting from vertical specialisation. Distance-related costs have a lower impact on foreign direct
investment and sales of foreign affiliates but there is a complementary relationship between trade and FDI.
Vertical specialisation networks have created new challenges for trade policymakers. In particular, growth
of bilateral exchanges between countries depends increasingly on barriers to trade and investment in the
rest of the world. Moreover, the impact of a country’s own trade barriers on domestic firms is significant in
the context of vertical specialisation. The analysis stresses the importance of multilateral negotiations for
trade and investment liberalisation.
