Global sourcing is on the rise. Recent estimates suggest that intermediate input flows account for about two-thirds of the volume of world trade (Johnson and Noguera, 2012). Boeing’s production of the 787 Dreamliner exemplifies the growing involvement of foreign suppliers in U.S. manufacturing: 70 percent of the Dreamliner’s parts are sourced from 50 suppliers located in 9 countries. Meanwhile, during the last U.S. presidential election, we saw a backlash against international trade. Research, too, documents negative effects of increased trade integration. However, most of this evidence comes from trade in final goods. This paper examines the question: how do we analyze the phenomenon of firms increasingly sourcing intermediate inputs?
Japan’s nineteenth century opening to world commerce after a long period of economic self-sufficiency provides a natural experiment to test the theory of comparative advantage and the gains from trade that it predicts. Drawing on a wide range of historical sources for data on prices, output and trade flows, this research finds that the country benefited from a significant boost to GDP in the years following its forced reintegration with the global economy. The evidence constitutes a strong indication of the potential costs of rejection of today’s open system of world trade.