22 the higher long-run trade elasticity for that period (Escaith et al., 2010). Conversely, the decline in the long-term responsiveness of trade with respect to income in the 2000s may well be a symptom that the technology shock of the 1990s has been absorbed and that the process of international production fragmentation has slowed down.<sup>14</sup> The changing long-term relationship between manufacturing trade and income that was documented in the previous subsection may be a symptom of changing international production relations.<sup>15</sup> In this respect, China and the United States are paradigmatic of two different situations. Because of data limitations, we can only present some circumstantial evidence. Note that the manufacturing supply chain between China and the United States, took to a large extent the form of parts and components being imported by the former and then being assembled into final goods which were exporter to the latter. The diminishing importance of such trade is reflected in the falling share of imports of parts and components in China’s merchandise exports, from the peak in the mid-1990s of 60 percent to the current share of approximately 35 percent (Figure 8).<sup>16</sup> This decline is even more pronounced as a 14 While the focus here is on the long-run trade elasticity, one should also expect a discrepancy between the short and the long-run dynamics of trade and income data. The persistently high short-run elasticity for the 2000s documented in Section III may reflect the fact that the impact of a GDP shock is larger in a world where global supply chains are more developed. The literature on the trade collapse discussed several mechanisms through which vertical specialization may increase the short-term responsiveness of trade to GDP -e.g. if expenditure declines more in vertically specialized sectors (Bems et al., 2011), if there are inventory –also called bullwhip- effects (Altomonte et al., 2012), or if there is re-nationalization of production chains (Buono and Vergara-Caffarelli, 2013).

15 Similarly, we find evidence that the elasticity of durables trade has decreased from 2.7 in the long 1990s to 0.8 in the 2000s. This is consistent with the changing structure of global supply chains, which are more concentrated in complex goods such as durables relative to non-durable sectors (Ferrantino and Taglioni, 2014). For brevity, these regression results are not reported.

16 WTO (2014 a and b) also investigates the evolution of China’s position in global value chains. They find that foreign inputs contained in China’s exports increased by 13.8 percent between 2000 and 2009 (“Evolution of GVC participation and its components, selected Asian economies,” in WTO 2014b) and that between 1995 and 2008 China’s position becoming more downstream (Figure C.7 in WTO 2014a). The apparent difference from our conclusions arises first of all because the WTO figures include imports not just of parts and components but also of fuel and raw materials. Since the prices of commodity inputs increased significantly in the 2000s, lumping together components and raw materials may create the impression that China’s exports became more import dependent even though it was reducing its reliance on imported parts and components. Despite this difference, the data on which the WTO charts are based, and to which we were given access, show that in fact China became more upstream since 2005 and that foreign inputs contained in exports actually declined by 3 percent after 2005.