Research Institute of Economy, Trade and Industry (RIETI) RIETI BBL Seminar Handout GVC Journeys When National and Territorial Comparative Advantage Differ December 11, 2018 Speaker: Richard Baldwin https://www.rieti.go.jp/jp/index.html
GVC Journeys by Richard Baldwin & Toshihiro Okubo RICHARD BALDWIN PROFESSOR OF INTERNATIONAL ECONOMICS THE GRADUATE INSTITUTE I GENEVA
Background question: Was comparative advantage denationalised?
#1. EMs lowered tariffs a lot AEs much less 50 45 40 35 30 25 20 15 10 5 0 Applied tariffs (%) South Asia Middle East & North Africa East Asia Sub- Saharan Africa US, Japan & EU 3 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
#2. Shocking Share Shift in Manufacturing. World shares: 7 losers 7 risers RoW = little change. World manufacturing share 80% 70% 60% 50% 40% 30% 20% 10% 0% 1970 1975 1980 RoW 6 risers, 5% 1985 1990, G7 65% 1990 3% 1995 2000 2005 2010 47% China, 18% 9% Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland
#3. Two way trade in similar goods goes North South, too Intraindustry trade indices 80% 70% 60% 50% 40% 30% 20% 10% 0% Germany -France US- Mexico 1990 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Germany- Poland US- Mexico Japan- Thailand 5
#4. Two way trade in similar goods goes North South, too Intraindustry trade indices 80% 70% 60% 50% 40% 30% 20% 10% 0% Germany -France US- Mexico 1990 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Germany- Poland US- Mexico Japan- Thailand 6
#5. Parts and components flow wrong way?
What explains this? 1. Old Globalisation (1 st unbundling): Lower barriers allow nations to exploit existing comparative advantage. (Trade led globalisation) 2. New Globalisation (2 nd unbundling): Better ICT allows North >South flows of firm specific knowhow that changes existing comparative advantages. (Knowledge led globalisation) 8
25 20 15 10 5 0 5 Weak direct evidence of knowledge flows Net receipts for IP (billion US$) Net receipts for IP (billion US$) Germany Japan US (right scale) 95 85 75 65 55 45 35 25 0 1 2 3 4 5 Korea, Rep. Mexico Thailand 15 6 5 China (right scale) 5 7 0 5 10 15 20 25 30 9 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Actual question addressed in this paper: Can we identify GVC paradigms? Like Inward Oriented vs Export Oriented development paradigms of yesteryear? e.g. Thailand focused on autos; Philippines much broader; Costa Rica focused on services, etc. Can we classify the GVC Industrialisation Journeys into helpful categories?
Trade in parts vs final goods The necessary suspense of disbelief: Assume exporting parts from South to North reflects North tech + South wages (the tech is in the parts) Export of final goods less so (assembly activity is simpler and ubiquitous before 2 nd unbundling) But may be interesting even without suspended disbelief
The GVC Journey diagram 1. Empirical Comparative Advantage (ECA) index For country c in sector i and k=parts, or goods Measures Territorial Comparative Advantage (Comp.Adv. when sources of comp.adv. cross borders within int l supply chains) From 1 (comp.disadv) to 1 (comp.adv.)
GVC Journey diagram Goods ECA index Parts ECA Index
GVC journey diagram (,+) Emp.Comp.Adv. in goods, not parts (+,+) Emp.Comp.Adv. in parts & goods (typical G7?) (, ) Emp.Comp.Disdv. in parts & goods (typical EM pre 1990) (+, ) Emp.Comp.Adv. in parts, not goods
Example of paradigms ECA goods Pure import substitution ECA parts
Example of paradigms ECA goods ECA parts Successful export led industrialisation
Example of paradigms ECA goods ECA parts Assembly export platform
0.6 Germany s GVC Journey Transportation equip Other machinery Electrical & Optical 0.4
Transp. Global sourcing boosts comp.adv. in final Germany s GVC Journey STYLISED OtherMach Offshoring production Electrical & Optical Offshoring production
US s GVC Journey Electrical & Optical 0.1 Transp.Eq Other machinery 0.4 0.2
Japan s GVC Journey 1.0 Other machinery Transp.Eq Electrical & Optical 0.0 1.0
0.8 Electrical & Optical China s GVC Journey Transp.Eq Other machinery 0.4 0.4
Mexico
Mexico
EMs lowered tariffs; AEs much less 60 50 40 30 20 10 0 Thailand Malaysia Indonesia Taiwan,China China Philippines Korea Rep. 28 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1990
Spider: Basic assumptions Perfect competition, constant return, 2 regions. All final consumption in North. Shipping costs of final good t = traditional trade costs Coordination cost: Per-unit costs is tθ(y) paid if part not produced in region of assembly. = efficiency loss due to spatial separation. 29
Comparative advantage PARTS: Parts are indexed by type y ε Y Unit production cost are: b(y) in S normalised to 1 in N. S has comp.adv. in parts b(y)<1 ASSEMBLY: Assembly of parts costs: a N in N a S in S. S has comp.adv. in assemble iff a S <a N. 30
Intermed results: Spider Each part is a point in b, space. Part s relative cost in S b b b N = 1 + θ N Threshold part; assembly in S 1 NS b S b S = 1 - θ Threshold part; assembly in N Part s coordination cost
Spider Part s relative cost in S b b b N = 1 + θ N 1 NS 3 sets of parts, N, NS, S N: always cheapest in N S: always cheapest in S. NS: cheapest to co-locate with assembly. b S b S = 1 - θ Part s Offshoring cost 32
Cost minimisation Given sets N, S and NS chosen to min costs for given t Assembly in S iff is greater than 33 dy y y t y b dy y a y y N S NS N ) ( ) ( ) ( ) ( 1 dy y y b dy y y t t a y y S NS S N ) ( ) ( ) ( ) ( 1 (1).
Offshore overshooting & reshoring Easy results:. Shift in assembly leads to too much parts overshooting (compared to costless trade case) likely to occur. Lowering t reverses this reshoring. b 1 b b N S b N = 1 + θ NS b S = 1 - θ 34
b / 2 b / 2 A ( t ) b R ( t ) b Simple example Focus on comparative advantage; - Assume all coordination costs, s, equal for all parts, so horizontal axis now t, not theta Start with assembly in North; assume a S <a N. N b = 1 NS S Assembly in S Assembly in N t Result: Offshoring overshooting of parts 35
Production technology and distribution of comparative advantage 36
Asymmetric parts production and exports with knowledge-led globalisation 37