Mid 2 Flashcards
(113 cards)
1
Q
What happened at the beginning of the first unbundling? When did the first unbundling start?
A
- 1820
o Massive reversal of fortune
Caused by lower trade costs which drive the “unbundling” of production and consumption
For the first time ever, one can choose to produce there and to sell here’: production no longer needs to be near consumption
2
Q
What happens to A7 and G7 countries in the first unbundling?
A
o A7 down, G7 up
3
Q
What is the mechanism through which globalizations first unbundling creates this massive reversal of fortune?
A
The drivers of this first unbundling are steam revolution and trade liberalization
4
Q
What is one way of describing economic globalization?
A
o Economic globalization = integration of markets across space
o Started 1815-1820
o A good indicator of this (integration of markets across space) and thus economic globalization is the convergence of international prices
5
Q
What is the concept of supply and demand
A
o When the market is “local” the level of price depends only on local supply and demand
6
Q
When did the convergence of international prices begin? Who became the first super power?
A
- Convergence of international prices started around 1815:
o Not only due to new economic forces but also to a new political environment:
1815is to the end of the Napoleonic wars
Congress of Vienna (1820) stabilised intra-European and international relations
British empire was in the process of becoming the first superpower
7
Q
What is the main trigger of 1st unbundling? What is its main principle
A
Steam revolution
• Major tech breakthrough that transformed human’s relationship with the physical world
• Pushes and pushed by the industrial revolution
o Changed tech of production by introducing machines in the production process
• Leads to radical reduction in trade costs
o With and among nations
- steam engine principle
heat has been converted into movement
8
Q
What happened in 1886?
A
first commercial production of motor vehicles with an internal combustion engine
• First used in the 1880’s
• The industrial revolution is a revolution in energy conversion
Steam revolution transforms transportation
• 1850 oceanic travel was transformed
• Railroads spread from 1840’s
• Decreases transportation cost, time and prices
9
Q
What is the second trigger of the 1st unbundling? Explain it’s results through time
A
- Trade liberalization
o Countries lower international trade taxes, called tariffs
Result:
• Trade cost fall (1750-1990)
• 1750-1820
o Trade costs fluctuate with war and peace, and slowly advancing sail tech and ship desing
• 1820-1905
o Trade cost reduced from between 40% and 60%
o Steady fall over a century
• 1905
o Spiked due to war
• 1945-1990
o Resumption of steady decline
Bottom line: trade costs (transportation and tariffs) fell dramatically and trade volumes boomed
10
Q
What are the three periods of the 1st unbundling
A
- The set up in period (1815-1913)
- Confrontation in period 2 (1915-1949)
- Resolution in period 3 (1950-1990)
- Economic domination shifts from A7 to G7
11
Q
What were the main changes in the first unbundling
A
- Trade boomed
- Northern and G7 industrialization
- Southern and A7 de-industrialization
- Urbanization
- The ‘great divergence’
12
Q
When did UK move to free trade? Who followed?
A
- UK to FT: britains move towards free trade (ft) leading up to 1846 Repeal of the corn-act (free trade in grain)
- Continent copies UK: Free policy spread to continental Europe (1846 to 1879)
- Continental Reversal: protectionism in the modern sense (pro-industrialization) rises from 1879-1914 almost everywhere but UK
o Bismark led protectionist surge; connected with nation building – known as “import substitution industrialization”
13
Q
What is a tariff?
A
- Tax levied at the border on the import of products
14
Q
What are the different types of tariffs
A
o Ad valorem tariff: tax expressed as % of the purchasing price
o Specific tariff: tax expressed in $ per unit
o Ad valorem tariffs are far more prevalent today
In the 19th century specific tariffs were a lot easier to use
o 19th century tariffs
Independent nations in America had higher tariffs
British dominions with ‘self-government’ (Canada, NZ, Australia) had intermediate tariffs
Colonies had low tariffs
15
Q
Explain import substitution industrialization
A
o Protectionism policy aimed at inducing domestic firms to produce and to grow in industries judged as important for the development of a country
Has been tried by many countries across time
Often failed
Economist view: if there is a problem preventing growth, identify the source of the problem and adopt a policy directly aimed at this problem
Protection is easy, but, by itself, is rarely the solution to low level of industrialization
16
Q
Why do northern industrialize and southern deindustrialize
A
- Markets expand globally but production clusters locally
o Production clusters locally as markets expand globally due to high communication costs
o Easy to transport goods, not so easy to produce them unless production is ‘under one roof’, large scale and/or in carefully chosen locations
o Extreme clustering
Ford refined methods of assembly-line production
o Micro-clustering fosters innovation
Clustering in factories ignites innovation and growth
First unbundling induces manufacturing to cluster in factories and in industrial districts to save on the costs of moving ideas and people, leading to new coordination of activities, new organizations, new processes, new ideas and to innovation - Distance still matters but in new ways
17
Q
What happened to Detroit and the automobile industry
A
- Detroite became known as ‘Motor City’ because many automobile companies grew in Detroit
- Detroit concentrated the production and all the services associated with the automobile industry
- Each company was not only large (ford) but each company also benefited from the proximity of other automobile and related companies for more innovations, expertise bringing lower costs of production and better cars (Ford went from 800$ to 300$)
- Pittsburgh = steel city
18
Q
What does the concentration found in Detroit with the automobile industry create
A
- Know-how imbalances due high communication costs
- Northern innovations stay in North due to high communication costs
- Difficult because expensive to transfer tech and up-to-date knowledge
19
Q
What is industrialization
A
Virtuous cycle for a few countries; Vicious cycle for many others
20
Q
Explain the loop of industrialization
A
- Comparative advantage => industrial exports => Industrial clustering => industrial competency => Comparative advantage (loop)
- Regions and countries benefiting from this virtuous cycle grew and those without this cycle stagnated and fell behind
21
Q
What is comparative advantage
A
- Comparative advantage: refers to the ability of any country to produce goods and services at a lower opportunity cost than other countries
Needs to be distinguished from absolute advantage
Absolute advantage: a country may have better tech, be bigger and better at everything, still wants to buy goods and services from other countries
o Opportunity cost: the value of what needs to be given up when producing or consuming more of something else;
Canada for example has an advantage with wheat, lumber oil,
22
Q
What determines comparative advantage
A
- Luck: latitude, climate, geographical position
- Endowment: land, labour, capital
- Technology: including scale economies
- Institutions: rule of law, property rights
23
Q
What are the two scale economies
A
Internal and external economies of scale
24
Q
What is internal economies of scale
A
o The average cost at the firm level decreases when the production of that firm increases
o Source:
Learning by doing
o Consequence:
Firms able to take advantage of internal economies of scale are typically large often controlling a significant share of the market in which they operate.
25
What is external economies of scale
o Average cost of production of all the firms in a region/ city decreases when the total production in that region/city increases
o Lead to clustering/ agglomeration of activities
o Source:
Concentration of expertise and specialized services
o Consequence:
Those regions with a head start are tough to catch up in industries with strong external economies of scale. Roughly, greater product/service sophistication implies more expertise leading to stronger external economie’s of scale in specialized cities/ regions/ countries. These firms have a competitive advantage but not necessarily high profits
o Q= quantity produced by ALL the firms in a given area (region, city)
26
What is mechanism
o Lower trade costs giver easier access to more distant markets and thus to greater demand for a product
Sales can be expanded
Need to produce larger quantities of the goods for which a country has a comparative advantage to satisfy this expanded demand
27
What is urbanization
o Is a consequence of the first unbundling. It took place in the Atlantic economies
o Reflects strong correlation between urbanization and incomes.
28
Knowledge accumulation drives what?
• wage and income growth
◦ Income per capital grew in G7 countries because wages grew, wages grew because labour became more productive and labour became more productive because of innovations
◦ Growth enhances innovation and vice versa and know how increases profit which increases wages
29
What happens in G7 type countries
• high know how and labour and high wages
30
What happens in A7 nations
• low know how and labour and low wages
31
What happened in the 19th century
• growth take offs in G7 economies created the great divergence
• By 1970 US income was almost 20 times higher than China’s
• The gap between ancient South Asia and the rest of advanced industrialized nations was almost as large
(Great divergence)
32
What are the major events of the 1st unbundling
* countries have chosen to lower barriers to trade between 1820 and 1990 to go beyond lower transportation costs
* Unilaterally bilaterally or multilaterally
* We want to understand the aspects of the economics of trade liberalization;
* This is important as there is no guarantee that globalization will go on. There are indeed some signs of rebuilding consumption and production
* The economic of trade liberalization is the main topic today
33
What happened in period 2 of the first unbundling
• World wars and Great Depression
◦ Warfare and economic dislocation reduced international trade
◦ Inter-war tarifs driven by backlash against globalization
◦ Fascism, smoot-Hawley protectionism (us tariff and retaliation)
◦ Britain not willing/unwilling to support the world trading system leading to rebuilding
• Period of nationalism and protectionism
• Identified needs for global institutions, practices and cooperation among nations
◦ UN, IMF, World bank, GATT
• Basically global trade slowed and everyone raised their tariffs as a retaliation against each other in a time of mistrust (tit for tat style)
34
What happened in period 3 of the first unbundling
• Transport advances and trade liberalization
◦ The world learns from it’s mistakes: trade was institutionalized and liberalized with the general agreement on tarifs and trade (GATT)
◦ Colonies became nations
◦ Transportation advances
‣ Containerization
‣ Refrigerated ships and trucks
‣ Air trade
35
What is the importance of shipping containers
* the shipping container- although only a simple metal box has transformes global trade
* In 1965 dock labour could move only 1.7 tonnes per hour onto a cargo ship; five years later, they could load 30 tonnes an hour
* “The container has been more a driver for globalization than all trade agreements in the past 50 years taken together”-Economist, may 18, 2013
* Multi-modal transportation: ships trucks and trains
36
What were the waves of liberalization
* wave 1-1945-1985
* Wave 2-1986-2000
* Wave 3-2001-2021
37
What are the main elements of wave 1 of liberalization
• big year 1947
◦ Marshal plan launched (June)
◦ Council of European economic cooperation (CEEC) launched to form marshal aid plan (July)
◦ GATT signed (Oct)
◦ First intra European clearing mechanism agreed by CEEC (Nov)
38
What happened 1947-58
* GATT starts-it is mostly a club of WW2 members
* US leadership
* Germany joins GATT in 1950
* Japan in 1955
* Tariff percentages dropped because of GATT
* trade liberalization is mainly for manufacturing goods not so much for agricultural services
* 19 members in 1947 to 40 in 1960 to 165-167
* Now world trade organization
39
What is the concept of GATT
• a multilatteral fourm aimes at negotiating freer trade; avoid/restrict use of non tariff barriers Obligation to declare export subsidies
• Based on the fundamental principle of non discrimination
◦ Most favoured nations- every country belonging to GATT/WTO must be treated the same: if a country benefits from a lower tariff all members should benefit too
◦ National treatment- once a product has crossed the border, it should be treated no less favourably than a domestic product
• Binding tariff schedules: once tariffs have been negotiated they should not be increased
◦ What about tariffs imposed by the US on China and those imposed by China on the US
• Tariffs can be temporarily raised for specific products in particular situations
◦ In a reaction to foreign subsidies creating injuries in a domestic industry
◦ When the surge in imports creates serious injury to domestic products
◦ If the GATT/WTO judges this as being inconsistent with the GATT charter countries can impose reataliatory tariffs
‣ Example the bush steel tariff imposed in 2002-04 quickly elimated when the US lost the case
‣ Canada complained to the WTO regarding US application of safeguard provisions
• Dispute resolution mechanism
40
What happened 1958-1964
• Regionalism kick starts multilateralism and triggers domino effect in Europe
• EEC comes into force
◦ EFTA formed in UK in reaction. Original members were Austria, Denmark Norway Portugal Sweden Switzerland and the UK still exists today with Iceland lichestein norway and Switzerland
◦ UK applies to EU in 1961
• Dominos spark multilateral negotiations to lower discrimination
◦ 1962 US trade act allows formula tariff cuts
◦ Important GATT round of negotiations: Kennedy round (1962-67)
41
What is a regional trade agreement
1. Tree trade area: Free trade among members every member keeps its own tariff schedule with respect to non members
A. NAFTA now usmca
2. Custom unions: Free trade among members with common tariff schedule with respect to non members
A. EEC now EU
By definition, regional agreements are discrimination
• trade is free among members and not free between a member and non member
• Regional agreements are thus always costly to non regional members
• Regional agreements can be costly to members too
◦ A regional trade agreement can be costly to its members when there is trade diversion
◦ A trade agreement is beneficial to its members when there is trade creation
42
What is trade creation
• The regional agreement creates new flow of international trade between members for goods and services
◦ New imports benefiting foreign consumers since they did not copnsime the product/service before the agreement
◦ New exports benefiting domestic firms that were selling only to domestic consumers before the agreement
◦ These are similar gains as occurring when opening international trace: both members gain from this new trade and the volume of international trade increases
43
What is trade diversion
• trade increases between two members but at the expense of trade with non member
44
What happened in 1965
• regionalism spreads beyond Europe
◦ US- Canada auto pact (1965)
◦ Australia new Zélande FTA (1965)
◦ 1st postwar Latin America FTA (1960 and 61)
• Unilateral preferences to developing nations (special and differential treatment)
◦ Low tariffs on some goods coming from countries designed as developing countries
“
45
What happened 1962-73
• South-south regional trade agreements
◦ Decolonization- GATT members
◦ Import-substitution and south south politics new south south regional trade agreement
◦ GATT’s Keneddy round tariff cuts phased in
◦ Non tariff barriers rise
46
What is a non tariff barriers and give examples
• barrier to trade other than tariff such as
◦ Quota- quantative restriction (cannot import more than a specific number of unit or tons per year)
◦ Anti dumping- process through which domestic firms as governments to investigate whether specific foreign firms “dump” (sell below fair price)
‣ Canada was the first country to impose anti dumping duty in 1904
‣ Every county has an anti dumping law today
◦ Domestic procurement policy- purchases by government resticted to domestic firms
◦ Others: subsidies, technical barriers import licensing, procedures etc
47
What is trade liberalization and NTB’s
• tariff liberalization through GATT/WTO and FTA have a tendency to bring more non tariff Barriers
◦ Quotas
◦ Antidumping restrictions
◦ Other regulations
• Because…
◦ Lobbies in import competing industries find new ways to influence the government
◦ These new ways are more specific/targeted and with more limited scope
◦ GATT/WTO places restrictions on their use
◦ overall trade liberalization is a bit less often than advertised
48
What happened 1973
* EEC first enlargement (UK, DK and IRL join)
* Creates west European FTA
* GATT Tokyo round launched 1973
49
What happened 1973-85
• GATT Tokyo round (73-79) launched and completed
◦ First round to tackle beyond tariff issues
• Regionalism advances in Africa and Asia
• Oil shocks and stagflation make liberalization difficult
◦ Non tariff barriers continue to rise through quotas in particular
50
What is a subsidy and countervailing measures
• when a country subsidizes the production of a good that it exports, foreign countries have a right to impose a tariff on the sub sized imports équivalant to the rate at which the good is subsidized. This special
51
What happened 1994 and 95
* 1994 Uruguay round ends
| * WTO launched from 1995 replacing GATT
52
How do countries choose to move on from high tariffs
* we must understand the forces determining a tariff within a country
* And to understand hwy countries mainly choose to do this bilaterally or multilaterally
* Finally to understand the forces determining a tariff in a country evolve with lower tariffs in this country and elsewhere
Milk is concentrated in production which is why the protection is sensitive
Everyone needs milk to people want it to be cheap so low tariff is good. That’s why it’s an important Gov issue
Political economy of tariff levels and liberalization
Q: what determines levels of a nations tariff such as milk in Canada
A: Gov choses tariffs to balance special interests and general well being of the nation
53
What is the trade liberalization paradox
* initial tariff is “politically optimal”
* Paradox: if tariffs are chosen to be politically optimal, how can it be politically optimal to lower or to remove tariffs?
* Solution; must focus on things that change
54
What is the 3 mechanism of lowering tariffs
* multilateral talks (WTO based rounds)
* Regional trade agreements
* Unilateral
55
To determine what is individually rational for a country, consider the US
1. When Canada choses free trade, the us prefers protection to free trade
2. When Canada chooses protection, the US also prefers protection to free trade
3. Thus the US prefers protection irrespective of what Canada choses: Protection is a dominant strategy for the US in this example
4. Check this isn also the case for Canada given each choice by the US
5. Protection is the combination of rational choice for the us and Canada when each makes and individual decision
6. The only way to break this dilemma is to cooperate and to agree on a binding agreement hence NAFTA EU GATT/WTO ETC
56
What is the prisoners dilemma
• countries choose to negotiate because they recognize that it is the only way to bring gains from trade liberalization
• To achieve this internally (i.e. to counterbalance the pressure from import competing industries), a giv needs to find allies
◦ Export industries are these allies
◦ Example automobile industry
57
Why does the affect on tariffs reinforce itself
• the agreed multilateral tariff cuts change further the political en only landscape inside each nation
• Since political strength linked to sector size the initial tariff cuts:
◦ Downsize and weaken import competing sectors
◦ Upsize and strengthen export sectors
• The reciprocal tariff cut strengthened pro liberalization and weakens anti liberalization forces in all nations taking part in multilateral tariff Curt’s
• At the next multilateral negotiation all nations find it politically optimal to cut tariffs again
58
What are the three implications of the second unbundling
* changes in the nature of competition amongst nations
* Changes at the production level
* Changes within nations
59
What are the 3 main points of change within nations (second unbundling)
* labour market hollowing
* Rising equity premium
* Globalization impact with finer resolution
60
What is labour market hollowing
Hollowing-out' or 'job polarisation' is the process by which the shares of total employment in high-ranked and low-ranked jobs have expanded relative to middle-ranked jobs over time, where jobs are ranked by their initial wage.
61
Give examples of winners and losers of the first unbundling
productive factors: high skill, medium skill and low skill workers
• 3 goods/ sectors each intensive in HM or L workers
• There is know how in all sectors
• 2 nations: north and south
• North is abundant in H and M ans scarce in L
• South is abundant in L bust scarce in H and M
• North know how better in all 3 sectors
62
What is difference between second a first unbundling with respect to workers
North looses medium skill workers and south gains them
63
What happens in second unbundling
• now north M-sector know how goes to the south
• As a result, goos 2 is now exported by the south: comparative advantage shifted from north to south
• Good 1 is still exported by north and good 3 still exported by south
• Which factor wins/ losses
◦ South know how in M sector wins: m factor wins
◦ Bad for north m factor which losses
• Other winners and losers a bit less clear as the transfer of know how to the south may affect them as well
64
How do me measure GDP
• Expenditure approach
GDP=C=I+G+X-M
Where c=consumption, I= Investment, G=government spending, X=exports, M=imports
• Production approach: the sum across all industries of their value added (VA)
• Income approach: adding incomes that firms pay household for factors of production they hire: wages for labour, interest for capital, rent for land and profits for entrepreneurship, this gives the gross national income (GNI). When computing these we can measure the share of labour in national income
• In principle, these 3 methods provide the same answer, thus GDP=GNI
• In practice they do not because of errors of measurement
Traditional labour earns about 60% of natty income. In the last 20 years or so, the share of labor income has decreased below 60%
65
What are the causes of increased income inequality and lower labour share of national income
• globalization triggered by the 2nd unbundling
• Technological changes triggered by the ITC revolution
• Increased firm monopoly power/concentration and unions not as powerful as they once were
There are reasons to think that technological changes have had a greater impact on the share of labour than globalization;
Increased firm monopoly power is a more recent explanation gaining credence
• the 2nd unbundling breaks up the national team of technology and labour
66
What is the education policy
• 1st unbundling globalization
◦ Operates slowly (controlled by economic liberalization)
◦ Predictable shift to comparative advantage sectors
◦ Education fosters adjustment and upgrading
• 2nd unbundling globalization: unpredictable ans sudden
◦ Workers will change jobs more frequently
◦ Need to acquire new skills
• Learn how to learn, not just new things
◦ Shorter, broader education
◦ More focus on retaining and restrain ability
67
What is the competitiveness policy
* competitiveness policies are policies that promote economic growth
* Competitiveness includes the set of instructions and factors that determined the level of productivity of a country
* Increasing productivity in a country is key for output and income to grow and standard of living and hopefully well being to improve
* Competitiveness policies that are pro growth foster investment in human physical social and knowledge capital, and ensure the capital is deployed wisely
68
What is the productivity concept
* productivity: the average amount of goods and services produced by a worker in a given amount of time
* It is often measured by evaluating GDP per hour worked
* Productivity is very different across countries
* A countries standard of living depends on its ability to produce goods and services and this on productivity
* There is no difference for a country:
* The mechanization of agriculture has allowed us to increase food production with a much smaller share of the population than there used to be
* People moved manufacturing and the same phenomenon has occurred
* We have a multiplication of products and service activities because we have become more efficient at producing agricultural and manufacturing over time
69
What is the concept of productivity and capital
• this process is continuing today with new industries often in tech
• Increase in productivity is associated with increase in the stock of capital
• There ate several forms of capital
◦ Human capital
◦ Physical capital
◦ Social capital
◦ Knowledge capital
70
What is human capital
Intangible aggregate resources possessed by individual and groups within a given population. These resources include knowledge talents skill, etc
71
What is physical skill
tangible assets that assist in the production process. Buildings machinery and office supply
72
What is social capital
it can be defined as the networks of relationships among people who live and work in a particular society, enabling society to function effectively
• set of rules and norms, often unspoken, usually leasing to trust
• Social capital is important because economic interactions require prescience and a sense of social Justice
73
What is Knowlegde capital
(intellectual capital) intangible asset yuan represents valuable ideas methods processes and other intuitive talents that belong to companies
• Largely depends on expertise of employees
• Example: secret formula, next iPhone design patent and trademarks
74
What does competitiveness policy promote
• policies chosen usually involves
◦ Promoting investment in Knowlegde capital with gov sponsored research provate sector R and D subsidies, tax breaks, support for research universities etc
◦ Promoting investment in human capital with policies linked to education training etc
◦ Promoting investment infrastructure
75
What is traditional competitiveness policy
• key question for economic policy should always be:
◦ Why is a gov intervention needed
• The answer should be
◦ When the free market does not get it right
◦ With a policy directly linked to the reason why the free market does not get it right
• Thus the focus should be on spillovers of externalities
76
What is externality
Leads to a difference between private returns and society as a whole
77
What is negative externality
Society costs larger than private costs
78
What is positive externality
Private returns smaller than social returns
79
What is the concept of intra industry trade
- Exports and imports of products belonging to the same industry. These products are differentiated finished products (BMW vs Toyota) or intermediate products belonging to the same class of products (Car seats vs car engines)
80
What is a bilateral investment treaties and explain their global timeline
- Is an agreement between two countries regarding the promotion, the protection and the liberalization of investments made by investors from respective countries in each other’s territory.
- It provides a number of guarantees such as fair and equitable treatment (equivalent to non-discrimination for investments), protection from expropriation, free transfer of means etc
- A controversial aspect is that they typically allow for a separate dispute resolution mechanism whereby an investor whose rights under the BIT have been violated has resource to bindiong international rather than suing the host State in its own courts.
- This has led to liability risks and uncertain net gains from BIT’s, especially for less developed countries
- Are unilateral concessions of sovereignty by nations to attract inward FDI.
- 1959-1987
o Very few BTI’s signed
o FDI flows were modest
- 1987-2007
o BIT’s signed boomed
o Now over 2000 BITs in existence
81
What were traditional traffics
o North tariffs low
o South tariffs high
o North reduced tariffs gradually in GATT rounds
o South did less of it
82
What changes in the mid 1990s
Developing nations unilaterally lowered tariffs massively
Protectionism becomes destructionism
Not in GATT/WTO rounds
83
What is a regional trade agreement and what changed for them in 1990s
```
o Few RTA’s signed
o Mostly ‘shallow’ i.e. only tariff preferences
- Something changed
o From 1990
Numbers of RTA’s soars
Depth of RTA’s soars
```
84
What is deep vs shallow trade agreements
- Deep vs Shallow integration in trade agreements
o More and more trade agreements are deep by including a wide range of issues beyond tariffs, such as services, investment, intellectual property protection, competition policy, labour and environmental aspects. These policy areas involve domestic regulations (or behind-the-border measures)
o The effects of these measures are more difficult to assess than border agreements (trade creation and trade diversion) because changes to domestic regulations are difficult to tailor so that they favor only selected partners.
85
Why do deep trade agreements occur
o As trade becomes more open, countries’ policies increasingly depend on each other (collective decision is better than unilateral decision-making)
o Deep integration agreements may be necessary to promote trade in certain sectors and economic integration more broadly. This applies to international production networks which require government policies beyond low tariffs.
86
What are 3 of the main changes of the second unbundling
- Changes in nature of competition among nations (de-nationalization of comparative advantage)
- Changes at the product level
- Changes within nations; the new globalization has new impacts on national economies
87
What is the changes of competition amongst nations
- De-nationalized comparative advantage
o First unbundling comparative advantage
Exports = ‘bundle’ of national know-how, labour, capital, institutions
Ex: Ford (1930) = US labour + US capital + SU entrepreneurship and technology
88
What is a 2nd unbundling comparative advantage
Exports = mixtue of several national comparative advantages: knowhow, labour, capital, institutions
Boundaries of technology are no longer national
Global value chains redraw international borders of comparative advantage (Ricardo loses relevance)
- Change nature of trade
89
What is a non traditional trade
- Honda’s and Intel’s global value chain reached into the country and turned vietnam’s and Costa Rica’s comparative advantage into a de-nationalized blend of traits
o Japanese management knowhow and Vietnamese labour in the case of Honda
o US management + tech and costa rica location + labour in case of Intel
- Globalization is no longer about exploiting existing comparative advantage in one nation only
90
Why does denationalizing comparative advantage matter
- The principle of comparative advantage explains why nations trade
o Nothing changes wirth 2nd unbundling countries have still strong reasons to trade
- The principle of comparative advantage also explains:
o Who gains from trade
o What do changes in one nations competitiveness mean for other nations
o Who makes (exports) what
91
Who gains from trade 1st unbundling vs second unbundling
1 Who gains from trade
- Ricardo’s ‘all-nations-win result based on fundamental logic associated with 1st unbundling: trade allows each nation to use its resources more efficiently
- Sports analogy
o 2 hockey clubs discuss an exchange of players
o If trade occurs, both gain
```
Who gains from trade 2nd unbundling
- Different type of exchange
- On the weekends, the coach of the better team goes and trains players of the worse team
- Outcome
o Improves worse team
o Raises competition in the league
o But not clear if the better team win
o The coach definitely wins from selling his know-how to two teams instead of one
```
Take away from analogy
- If tech flows make foreign nations better at producing goods the G7 used to export, the change may harm G7 nation
o Gains from trade do not automatically hold when the sources of comparative advantage cross borders as well as goods.
92
Explain cross country competitive issues
- Fact: Offshoring improves the competitiveness of the Northern firms doing it
- Suppose Toyota offshores but Fiat does not
- Toyota’s increased competitiveness harms fiats competitiveness
- Thus, the de-nationalization of comparative advantage for nations participating in GVC’s can shift the comparative advantage of third nations
- Similarly, for developing nations
- China produces electric motors with advanced US know-how and low Chinese wages
- Brazil and south Africa struggle to compete with second tier know-how and low wages
o High tech + low wages beat low tech + low wages
- GVC participation by China and others harm industrial comparative advantage of developing nations not involved with GVC’s
- Outcome: Most countries/firms want to participate in GVC’s. This pushes countries to implement policies facilitating their participation
93
Who makes and exports what
- A country’s exports now depend on its position in global value chains rather than underlying comparative advantage as with 1st unbundling
- Overserved trade flows can be misleading
o Looking at the trade deficit between the US and China does not mean much with GVC’s
94
What does the comparative advantage explain
o Who gains from trade
o What do changes in one nations competitiveness mean for other nations
o Who makes (exports) what
95
What does the 2nd unbundling reflect the intertwining of
- Trade in parts and components;
- International movement of production facilities, personnel, and know-how
- The services necessary to coordinate the dispersed production
96
What is the 2nd unbundling reshaping
- Social policy
- Education policy
- Competitiveness policy
- Industrial policy
- Trade policy
97
How to deal with a fragmented footloose world
o Distinguish carefully between factors of production
Internationally mobile and immobile
o Both matter; both contribute to national income, but domestic taxpayers subsidizing something that leaves a nation is less obvious
o Need to think about ‘stickiness’ of factors in addition to positivie externalities/spillovers benefits
98
What is spillover vs stickiness
Positive spillovers (candidate for government promotion)
Stickiness (will actually stay in nation promoting it)
o Even if there is market failure, promoting basic science or financial capital is unlikely to affect local production
o Because it goes wherever its reward is highest
o It is better to coordinate highly mobile targets at the international level:
Patient policy
Large basic science projects
o R&D subsidies are less obvious but probably still a good idea to promote at the local level
o On the other hand, promoting technical education has a high return because people with technical education are less mobile;
o Highly-skilled labor is internationally mobile; the way to make it less mobile is to create industrial/ high tech clusters/hubs in cities and around universities
99
Why is human capital key
- People and skills are the most important factors of production regarding competitiveness policy associated with 2nd unbundling
- Rich, diverse set of skilled workers is both sticky and has positive externalities especially when there is agglomeration of these workers
- Skill-cluster is more than the sum of its parts; there are positive externalities (external economies of scale);
o Agglomeration effects create external economies of scale because there are positive externalities associated with agglomeration effects
o Human capital is also flexible and adapt to changing demands
100
What is the compétitives policy summary
- 1st unbundling globalization
o National technology and factors created comparative advantage
On the same teasm
o 2nd unbundling globalization
‘north tech’ increasingly combines with ‘south labour’
Nationally optimal policies must be more nuanced
• R&D subsidies=, tax beaks
• Consider ‘stickiness’ of economic activity
101
What is the industrial policy
- They typical industrial policy of yesterday: promoting manufacturing
- Today, good manufacturing jobs without the manufacturing
o Servicification of manufacturing implies that the good jobs in manufacturing are with the services related to manufacturing, not with production itself
o ‘compufacturing’ implies the need for highly skilled jobs
102
What is the impact of cities
- Cities as 21st century “factories”
o Urban clusters of talented diverse service workers may be best response to new high-tech-low-wage competition
o Cities are skill-clusters or brain hubs
o Knowledge economy has an inherent tendency towards geographical agglomeration
103
What is cities vs rural areas
- Cities are more than ever an engine of growth;
- This is because spillovers are more important than ever;
o Growth in employment activities and income in Canada is heavily concentrated in its cities
104
What is asymmetric nature
- Asymmetric nature of the change for Northern-developed countries vs Southern-developing countries:
o There is nothing fundamentally new about 2nd unbundling trade among rich nations (north-north)
o Big change is factories crossing North-South borders
o New flows are a revolution for developing-nation exporters, but an evolution for developed-nation exporters
105
Why asymmetric
- At the start of the 2nd unbundling, the knowledge-labour ratio was radically igher in the north than it was in the south
o Easier flows of ideas imply knowledge flooding from N to S, much less from S to N
- Ability to coordinate internationally was a revolutionary boost in developing nations’ abilities to export parts, but only mid stimulus for G7 parts exporters
o 2nd unbundling acted like an asymmetric trade opening
o Like northern tariffs on parts falling much more than southern tariffs
106
What is the impact on nature value added
- Smile Curve: Distribution of value
o Comes from dividing the value added between pre-fabrication services, fabrication, and post fabrication services.
- Servicification of manufacturing
- Which part of the production process is adding the most value added has changed.
- The smile curve can be extended at the aggregate level; i.e. at the level of the sectors: primary, manufacturing and services
107
What is social policy
o Growth requires changes and changes requires political support:
Political support requires sharing of gains and pains of globalization
• This is especially important as the social contract between labor and tech (or labor and capital/skilled labour) is being tested by the 2nd unbundling
Today institutions and polciies are still crafted for 1st unbundling environments
• They have a sector and skill group focus
• Labor unions, industry associations, government departments
• Economic policies for ‘sunset’ and ‘sunrise’ sectors
o 21st century social policies
Protect workers, not jobs
• Domestic flexibility may reduce offshoring of jobs
• Offshoring ultimate flexibility of firms
• Health coverage, old-age pensions flexibility,
108
What is G7 industrial policy
```
o Stop thinking manufacturing exports, and start thinking service inputs into manufactured exports:
o Stop thinking good sectors, and start thinking about good (service) jobs: and
o Stop thinking of domestic factories as the industrial base, and start thinking of the service sector as the 21st century industrial base
o Stop thinking of cities as a collection of people, and start thinking of cities as production hubs that nurture rapid recombination of diverse, world-class services
```
109
Why does regionalism matter
- Regionalism creates issues because:
o Economic inefficiency from discrimination
Trade creation and trade diversion
o Creates power asymmetries between members and non-members
o Danger for multilateral liberalization
- Equally true for 1st and 2nd unbundling
- GVC’s are mainly regional
- 2nd unbundling: it becomes more difficult to discriminate among source-countries. Discrimination has become less important
110
Explain the lack of discrimination tech
- Discrimination is easy with product trade and technically difficult with other international aspects:
o Services, capital, patents, know-how
- Very hard to define nationality of these in modern world,
o Easy ‘circumvention’ possible
- Many recent RTA provisions dealing with these aspects tend to have non-discriminatory provisions:
o They apply to everyone; not just to trade with members
111
What is different political economy
o 1st unbundling = exchange of market access
| o 2nd unbundling = northern factories for Southern reform
112
What is the implication of RTA bargain
o Only EU, US and Japan can do this deal (yet)
o Other countries do this move unilaterally;
A Canadian firm offshores shoe production in Thailand; Canada lowers import tariff on this type of shoes
o Or with a group of countries (new tpp):
o WTO does not have much to offer regarding 2nd unbundling => erosion of WTO importance in world trade governance
- Trade agreements, especially regional agreements, have adjusted a lot of the 2nd unbundling
113
What is mega regionals
- Mega-regional and Mega-bilateral trade agreements start to harmonize the bilateral rules
o TPP (even without US), EU-Canada, Japan-EU and offshoring partners
o US is questioning regional and multilateral aspects
- Implications for WTO
- Implications for emerging markets, especially China, India, Russia, Brazil
