In line with my suggestion that labels simply say “made in a series of places”, the WTO has announced a “Made in the world” initiative. It aims “to support the exchange of projects, experiences and practical approaches in measuring and analysing trade in value added.” “Made in the world” should be a valuable initiative, at least until the arrival of interstellar trade.
In line with my suggestion that labels simply say “made in a series of places”, the WTO has announced a “Made in the world” initiative. It aims “to support the exchange of projects, experiences and practical approaches in measuring and analysing trade in value added.” “Made in the world” should be a valuable initiative, at least until the arrival of interstellar trade.
Simon Evenett on “saving the WTO from the Doha Round“.
The FT takes a look at global supply chains in the wake of the recent tsunami:
In the past decade, many manufacturers have shifted component production to multiple contractors, often in low-wage Asian nations. This is to cut costs but it is also part of a general shift to slim operations and concentrate on what they regard as core areas, such as product development and marketing.
However, concurrent moves towards “lean production” – shaving inventories to the minimum and pushing parts through the system as fast as possible to cope with sudden variations in demand – have made supply chains increasingly susceptible to the kind of disruption seen in recent weeks in Japan…
“If all a manufacturer based in the US thinks about is unit costs, then it’s likely to have a global supply chain in which it transports components long distances [to a US assembly facility],” says Matthew Lovejoy, Acme’s president and owner. “But once you think about all the hidden costs that such complex chains involve, including disruptions in transport, the need to vary production to meet changes in your customers’ demands, plus the impact of unpredictable events like the Japan earthquake, then you realise these kinds of networks do not make sense.”
Accordingly, Mr Lovejoy has established three supply chains – each built around Acme’s three factories in Chicago, Brazil and Shenzhen, China. Each is largely autonomous but capable of supplying components to other parts of the business in the event of a sudden, localised disruption…
The lesson for industry from the Japanese disaster is that the consequences of such events on the global production system are always likely to be considerable. There are ways to reduce the sensitivity of supply chains to the effects of such incidents, through better planning and more distributed operations, but too few companies are taking advantage of them.
The whole article is worth reading. I previously mentioned this topic here.
Hat tip: Seb
In a piece titled “Ricardo Revisited: Sino-American Trade and Economic Conflict,” Ralph E. Gomory and William J. Baumol write:
In this note we look carefully at the impact on a developed nation of the economic development of its trading partner; a trading partner that is developing from a rather undeveloped state. If you want to keep the China-U.S. relationship and the impact on the United States of China’s development in mind as a possible example, you will not go far wrong.
We will discuss what a very standard model, the Ricardo model, shows about this situation. We will see that this very familiar model, properly analyzed, has a number of very unfamiliar consequences. Notably:
- The economic development of your trading partner can be harmful to you, the home country. Although the effect of that development starts out good, it ends badly.
- That there is a dominant and dominated relation possible between the two countries that is good for the dominant one and bad for the dominated one.
- A country can attain a dominant position only by having an undeveloped trading partner. This can occur naturally if the trading partner is simply there in an underdeveloped state, or the underdevelopment can be brought about by mercantilist actions that destroy that partner’s industries.
- There is inherent conflict not only between a nation in a dominant position and its trading partner, but also between that dominant nation and what may loosely be called the interests of the world. In a two-country model of the sort we discuss here this simply is measured as the sum of the benefits obtained by the two countries’ economies. We assert that from a world point of view, having either nation dominant is bad.
- While a country cannot gain a dominant position solely by building up its industries, it can avoid a dominated position by developing its own industries and not allowing them to be destroyed.
We will explain more clearly what we mean by these assertions as we go along… We will also explain enough about the Ricardo model to make that intelligible to those not already familiar with it.
A quick skim of their Appendix A shows that this is literally the standard Ricardian model. They’re just going to discuss comparative statics — what happens to the equilibrium outcome when countries’ productivities change? Unfortunately, a lot seems to obscured by their choice of words.
In the model, countries are symmetric in size and the representative consumers have identical Cobb-Douglas preferences. The “dominant” country is the economy with a larger share of world income — this means that it is more productive and/or makes the good with the larger expenditure share. The words “mercantilist” and “destroy” only appear in the introduction and conclusion, so I can’t say how they’re related to the analysis. Productivity is exogenous in the model and there are no policy instruments, so I don’t see how one avoids destroying industries or can actively frustrate the other economy’s productivity growth.
The word choice is frustrating, because some commentators have interpreted this as an attack on mainstream international economics: “Ralph Gomory and William Baumol, who have posited a much more widely applicable, if equally mathematically watertight, challenge to conventional trade theory.”
Nonsense. This is conventional trade theory. Whip out your copy of Dornbusch, Fischer, and Samuelson (AER, 1977) and turn to page 827:
An alternative form of technical progress that can be studied is the international transfer of the least cost technology. Such transfers reduce the discrepancies in relative unit labor requirements — by lowering them for each z in the relatively less efficient country — and therefore flatten the A(z) schedule in Figure 1. It can be shown that such harmonization of technology must benefit the low-wage country, and that it may reduce real income in the high-wage country whose technology comes to be adopted. In fact, the high-wage country must lose if harmonization is complete so that relative unit labor requirements now become identical across countries and all our consumer’s surplus from international trade vanishes.
According to Arvind Panagariya, this result was first shown by Harry Johnson in the 1950s. It had another widespread discussion in 2004 when Paul Samuelson revived it with a JEP article. (I remember blogging that seven years ago!) I see no challenge to orthodoxy here.
The standard Ricardian model doesn’t have intertemporal dynamics, so Gomory and Baumol aren’t in a great position to do welfare analysis, but let’s discuss it nonetheless. Note that free trade is preferable to autarky in every period. So cutting ourselves off from trade with China isn’t the answer. The options are either to (1) improve US productivity or (2) retard Chinese technical progress. I’m not aware of any free trader opposing the former, and the policy instruments available for the latter are, in the words of Avinash Dixit and Gene Grossman, “to ‘bomb China back into the stone age’ of their older lower productivity.”
The latest NBER Digest summarizes work by Henrik Kleven, Camille Landais, and Emmanuel Saez documenting how football [soccer] players respond to tax incentives.
[I]n studying teams’ performances from 1980 through 2009, they find that low-tax nations had better teams after Bosman. “This suggests that low-tax countries experienced an improvement of club performances by being better able to attract good foreign players and keep good domestic players at home,” they write.
Their study also looks at the impact of tax reforms in specific countries. For example, in 2004 Spain introduced the so-called “Beckham Law” (named after British superstar David Beckham, who was one of the first footballers to take advantage of it). It allowed nonresidents to be taxed at a flat rate of 24 percent instead of the progressive rate for residents, whose top marginal rate by 2008 stood at 43 percent. After the law, Spain saw its share of foreign players increase while nearby Italy, which had a similar top league, saw its share of foreign talent shrink.
Using tariff line data for the 20 largest importers, Theresa Carpenter and Andreas Lendle estimate that only 16.3% of global trade flows are given preferential treatment. (That estimate is an upper bound since they don’t observe preference utilization and therefore measure eligibility.) That seems small, and the authors conclude that “there is not much trade with high preferential margins.”
On the other hand, “on aggregate, preferences reduce the global trade-weighted average tariff from 3.2% to 2.1%.” (Their calculations don’t account for the endogeneity of trade volumes, so these 1.1 percentage points probably overstate the preferential margin. But remember that trade-weighted average tariff measures underestimate protection, so we’re taking the difference of two fuzzy numbers.) Policies equivalent to 1/2 of remaining global tariff barriers strike me as big. (Though tariff barriers are never big when compared to non-tariff barriers like labor mobility restrictions!)
John McCain got in trouble in some circles for saying that the iPhone is “built in the USA.” Leo Gerard corrected him by saying “the iPad and the iPhone are made in China, they’re not made in America.”
In a world of vertical specialization, what does “made in” mean? The product itself is pretty clear on the issue: “Designed by Apple in California. Assembled in China.”
[Photo by Chen Zhao]
Apple fails to mention that they’re assembling components manufactured in Taiwan, but you can forgive them for that. Maybe labels should just default to “Made in a series of places.”
Previous editions:
Do you remember Barry Lynn? I last mentioned him when Taiwan had an earthquake in 2006. In his 2005 book, End of the Line, he argued that
We have stretched our supply chains so far, and ratcheted them so tight, that even unavoidable natural or political disasters on the far side of the world today can smash like a tsunami right into the center of our own society.
You can imagine how Lynn would react to news stories like this one about global supply chains transmitting the shock of Japan’s earthquake/tsunami:
As Japan’s escalating disaster comes ashore in North America, automakers, suppliers and dealers are preparing for shortages of parts and vehicles.
- On Thursday, March 17, American Honda Motor Co. Executive Vice President John Mendel sent a memo to U.S. Honda and Acura dealers saying the disaster in Japan will disrupt dealer orders into May.
- General Motors’ Shreveport, La., factory, which builds the Chevrolet Colorado and GMC Canyon pickups, closed because it ran out of a Japanese part that it did not identify.
- Toyota Motor Corp. and Subaru of Indiana Automotive Inc. slowed North American production to ration their parts.
Of course, the cost of insuring against such supply shocks would be to build everything twice, which would be enormously expensive. As I reported in 2006, the global economy absorbed the Taiwanese earthquake rather easily. How much trouble will last week’s tragedy transmit outside Japan? Here’s the FT on China’s need for Japanese components and how global companies are reacting to potential disruptions.
Trade Diversion 