Production Clustering and Offshoring

I introduce a model of international production that allows the production chain to be of any length or number of sourcing countries and in which the production process does not have to be perfectly sequential. The presence of trade costs in this model makes firms cluster their production geographically, while trade liberalization allows firms to fragment their production more. Clustering patterns depend on the characteristics of the production structure, with stronger clustering associated with longer and less connected structures. Clustering intensity in upstream stages of production is generally higher and less affected by exogenous changes in production structure.