Mid 2

Question 1

What happened at the beginning of the first unbundling? When did the first unbundling start?

Answer 1

• 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

Question 2

What happens to A7 and G7 countries in the first unbundling?

Answer 2

o A7 down, G7 up

Question 3

What is the mechanism through which globalizations first unbundling creates this massive reversal of fortune?

Answer 3

 The drivers of this first unbundling are steam revolution and trade liberalization

Question 4

What is one way of describing economic globalization?

Answer 4

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

Question 5

What is the concept of supply and demand

Answer 5

o When the market is “local” the level of price depends only on local supply and demand

Question 6

When did the convergence of international prices begin? Who became the first super power?

Answer 6

• 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

Question 7

What is the main trigger of 1st unbundling? What is its main principle

Answer 7

 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

Question 8

What happened in 1886?

Answer 8

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

Question 9

What is the second trigger of the 1st unbundling? Explain it’s results through time

Answer 9

• 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

Question 10

What are the three periods of the 1st unbundling

Answer 10

1. The set up in period (1815-1913)
2. Confrontation in period 2 (1915-1949)
3. Resolution in period 3 (1950-1990)
   - Economic domination shifts from A7 to G7

Question 11

What were the main changes in the first unbundling

Answer 11

• Trade boomed
• Northern and G7 industrialization
• Southern and A7 de-industrialization
• Urbanization
• The ‘great divergence’

Question 12

When did UK move to free trade? Who followed?

Answer 12

• 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”

Question 13

What is a tariff?

Answer 13

• Tax levied at the border on the import of products

Question 14

What are the different types of tariffs

Answer 14

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

Question 15

Explain import substitution industrialization

Answer 15

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

Question 16

Why do northern industrialize and southern deindustrialize

Answer 16

• 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

Question 17

What happened to Detroit and the automobile industry

Answer 17

• 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

Question 18

What does the concentration found in Detroit with the automobile industry create

Answer 18

• 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

Question 19

What is industrialization

Answer 19

Virtuous cycle for a few countries; Vicious cycle for many others

Question 20

Explain the loop of industrialization

Answer 20

• 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

Question 21

What is comparative advantage

Answer 21

• 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,

Question 22

What determines comparative advantage

Answer 22

• Luck: latitude, climate, geographical position
• Endowment: land, labour, capital
• Technology: including scale economies
• Institutions: rule of law, property rights

Question 23

What are the two scale economies

Answer 23

Internal and external economies of scale

Question 24

What is internal economies of scale

Answer 24

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.

Question 25

What is external economies of scale

Answer 25

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)

Question 26

What is mechanism

Answer 26

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

Question 27

What is urbanization

Answer 27

o Is a consequence of the first unbundling. It took place in the Atlantic economies
o Reflects strong correlation between urbanization and incomes.

Question 28

Knowledge accumulation drives what?

Answer 28

• 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

Question 29

What happens in G7 type countries

Answer 29

• high know how and labour and high wages

Question 30

What happens in A7 nations

Answer 30

• low know how and labour and low wages

Question 31

What happened in the 19th century

Answer 31

• 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)

Question 32

What are the major events of the 1st unbundling

Answer 32

• 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

Question 33

What happened in period 2 of the first unbundling

Answer 33

• 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)

Question 34

What happened in period 3 of the first unbundling

Answer 34

• 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

Question 35

What is the importance of shipping containers

Answer 35

• 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

Question 36

What were the waves of liberalization

Answer 36

• wave 1-1945-1985
• Wave 2-1986-2000
• Wave 3-2001-2021

Question 37

What are the main elements of wave 1 of liberalization

Answer 37

• 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)

Question 38

What happened 1947-58

Answer 38

• 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

Question 39

What is the concept of GATT

Answer 39

• 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

Question 40

What happened 1958-1964

Answer 40

• 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)

Question 41

What is a regional trade agreement

Answer 41

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

Question 42

What is trade creation

Answer 42

• 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

Question 43

What is trade diversion

Answer 43

• trade increases between two members but at the expense of trade with non member

Question 44

What happened in 1965

Answer 44

• 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
“

Question 45

What happened 1962-73

Answer 45

• 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

Question 46

What is a non tariff barriers and give examples

Answer 46

• 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

Question 47

What is trade liberalization and NTB’s

Answer 47

• 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

Question 48

What happened 1973

Answer 48

• EEC first enlargement (UK, DK and IRL join)
• Creates west European FTA
• GATT Tokyo round launched 1973

Question 49

What happened 1973-85

Answer 49

• 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

Question 50

What is a subsidy and countervailing measures

Answer 50

• 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

Question 51

What happened 1994 and 95

Answer 51

• 1994 Uruguay round ends

* WTO launched from 1995 replacing GATT

Question 52

How do countries choose to move on from high tariffs

Answer 52

• 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

Question 53

What is the trade liberalization paradox

Answer 53

• 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

Question 54

What is the 3 mechanism of lowering tariffs

Answer 54

• multilateral talks (WTO based rounds)
• Regional trade agreements
• Unilateral

Question 55

To determine what is individually rational for a country, consider the US

Answer 55

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

Question 56

What is the prisoners dilemma

Answer 56

• 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

Question 57

Why does the affect on tariffs reinforce itself

Answer 57

• 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

Question 58

What are the three implications of the second unbundling

Answer 58

• changes in the nature of competition amongst nations
• Changes at the production level
• Changes within nations

Question 59

What are the 3 main points of change within nations (second unbundling)

Answer 59

• labour market hollowing
• Rising equity premium
• Globalization impact with finer resolution

Question 60

What is labour market hollowing

Answer 60

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.

Question 61

Give examples of winners and losers of the first unbundling

Answer 61

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

Question 62

What is difference between second a first unbundling with respect to workers

Answer 62

North looses medium skill workers and south gains them

Question 63

What happens in second unbundling

Answer 63

• 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

Question 64

How do me measure GDP

Answer 64

• 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%

Question 65

What are the causes of increased income inequality and lower labour share of national income

Answer 65

• 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

Question 66

What is the education policy

Answer 66

• 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

Question 67

What is the competitiveness policy

Answer 67

• 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

Question 68

What is the productivity concept

Answer 68

• 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

Question 69

What is the concept of productivity and capital

Answer 69

• 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

Question 70

What is human capital

Answer 70

Intangible aggregate resources possessed by individual and groups within a given population. These resources include knowledge talents skill, etc

Question 71

What is physical skill

Answer 71

tangible assets that assist in the production process. Buildings machinery and office supply

Question 72

What is social capital

Answer 72

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

Question 73

What is Knowlegde capital

Answer 73

(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

Question 74

What does competitiveness policy promote

Answer 74

• 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

Question 75

What is traditional competitiveness policy

Answer 75

• 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

Question 76

What is externality

Answer 76

Leads to a difference between private returns and society as a whole

Question 77

What is negative externality

Answer 77

Society costs larger than private costs

Question 78

What is positive externality

Answer 78

Private returns smaller than social returns

Question 79

What is the concept of intra industry trade

Answer 79

• 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)

Question 80

What is a bilateral investment treaties and explain their global timeline

Answer 80

• 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

Question 81

What were traditional traffics

Answer 81

o North tariffs low
o South tariffs high
o North reduced tariffs gradually in GATT rounds
o South did less of it

Question 82

What changes in the mid 1990s

Answer 82

 Developing nations unilaterally lowered tariffs massively
 Protectionism becomes destructionism
 Not in GATT/WTO rounds

Question 83

What is a regional trade agreement and what changed for them in 1990s

Answer 83

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

Question 84

What is deep vs shallow trade agreements

Answer 84

• 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.

Question 85

Why do deep trade agreements occur

Answer 85

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.

Question 86

What are 3 of the main changes of the second unbundling

Answer 86

• 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

Question 87

What is the changes of competition amongst nations

Answer 87

• 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

Question 88

What is a 2nd unbundling comparative advantage

Answer 88

 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

Question 89

What is a non traditional trade

Answer 89

• 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

Question 90

Why does denationalizing comparative advantage matter

Answer 90

• 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

Question 91

Who gains from trade 1st unbundling vs second unbundling

Answer 91

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.

Question 92

Explain cross country competitive issues

Answer 92

• 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

Question 93

Who makes and exports what

Answer 93

• 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

Question 94

What does the comparative advantage explain

Answer 94

o Who gains from trade
o What do changes in one nations competitiveness mean for other nations
o Who makes (exports) what

Question 95

What does the 2nd unbundling reflect the intertwining of

Answer 95

• Trade in parts and components;
• International movement of production facilities, personnel, and know-how
• The services necessary to coordinate the dispersed production

Question 96

What is the 2nd unbundling reshaping

Answer 96

• Social policy
• Education policy
• Competitiveness policy
• Industrial policy
• Trade policy

Question 97

How to deal with a fragmented footloose world

Answer 97

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

Question 98

What is spillover vs stickiness

Answer 98

 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

Question 99

Why is human capital key

Answer 99

• 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

Question 100

What is the compétitives policy summary

Answer 100

• 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

Question 101

What is the industrial policy

Answer 101

• 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

Question 102

What is the impact of cities

Answer 102

• 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

Question 103

What is cities vs rural areas

Answer 103

• 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

Question 104

What is asymmetric nature

Answer 104

• 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

Question 105

Why asymmetric

Answer 105

• 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

Question 106

What is the impact on nature value added

Answer 106

• 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

Question 107

What is social policy

Answer 107

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,

Question 108

What is G7 industrial policy

Answer 108

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

Question 109

Why does regionalism matter

Answer 109

• 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

Question 110

Explain the lack of discrimination tech

Answer 110

• 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

Question 111

What is different political economy

Answer 111

o 1st unbundling = exchange of market access

o 2nd unbundling = northern factories for Southern reform

Question 112

What is the implication of RTA bargain

Answer 112

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

Question 113

What is mega regionals

Answer 113

• 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