After a remarkable increase in the previous decade, world trade has been experiencing a dramatic fall in recent months. Vertical production chains have become a ‘propagation mechanism’ for these dramatic shifts. This article is based on recent research on vertical production chains and its determinants (Pitigala 2008) and highlights the implications of the global financial crisis on vertical production chains, with reference to the South Asia region. The results suggest that traditional policy barriers such as tariffs appear to have become less important for vertical trade; instead political risk, infrastructure and finance are more strongly associated with the growth of vertical specialization. The extent of vertical production chains and the weakening of the financial markets that support them explain the rapid contraction during the ongoing crisis. The effects may be long lasting as producers are forced to reconstruct not just weak, but broken links in their supply chains.
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