RIETI BBL Seminar Handout
December 11, 2018Speaker: Richard Baldwin
https://www.rieti.go.jp/jp/index.html
Research Institute of Economy, Trade and Industry (RIETI)
“GVC Journeys When National and Territorial Comparative Advantage Differ”
RICHARD BALDWINP RO F E S SO R O F I N T E RNAT I ONA L E CONOM I C STHE GRADUATE INSTITUTE I GENEVA
GVC Journeysby Richard Baldwin & Toshihiro Okubo
Background question:
Was comparative advantage denationalised?
#1. EMs lowered tariffs a lot
AEs much less
3
South Asia
Sub-Saharan Africa
Middle East & North Africa
East Asia
US, Japan & EU0
5
10
15
20
25
30
35
40
45
50
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Applied tariffs (%)
#2. Shocking Share Shift in Manufacturing.
World shares: ‐ 7 ‘losers’‐ 7 ‘risers’‐ RoW = little change.
1990, G7
65%
3%
6 risers,
5%
RoW
47%
China, 18%
9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1970
1975
1980
1985
1990
1995
2000
2005
2010
Wor
ld m
anuf
actu
ring
shar
e
Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland
Germany-France
US-Mexico
Germany-PolandUS-
Mexico
Japan-Thailand
0%
10%
20%
30%
40%
50%
60%
70%
80%
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Intraindustry trade indices#3. Two‐way trade in similar goods goes North‐South, too
5
1990
Germany-France
US-Mexico
Germany-PolandUS-
Mexico
Japan-Thailand
0%
10%
20%
30%
40%
50%
60%
70%
80%
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Intraindustry trade indices#4. Two‐way trade in similar goods goes North‐South, too
6
1990
#5. Parts and components flow “wrong way”?
What explains this?
1. Old Globalisation (1st unbundling): Lower barriers allow nations to exploit existing comparative advantage. (Trade‐led globalisation)
2. New Globalisation (2nd unbundling): Better ICT allows North‐>South flows of firm‐specific knowhow that changes existing comparative advantages. (Knowledge‐led globalisation)
8
Weak direct evidence of knowledge flows
9
‐5
5
15
25
35
45
55
65
75
85
95
‐5
0
5
10
15
20
25
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Net receipts for IP (billion US$)
Germany
Japan
US (rightscale)
‐30
‐25
‐20
‐15
‐10
‐5
0
‐7
‐6
‐5
‐4
‐3
‐2
‐1
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Net receipts for IP (billion US$)
Korea, Rep.
Mexico
Thailand
China (right scale)
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 2nd 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 parts, not goods
(+,‐)Emp.Comp.Adv. in parts, not goods
(‐,‐)Emp.Comp.Disdv. in
parts & goods(typical EM pre‐1990)
(‐,‐)Emp.Comp.Disdv. in
parts & goods(typical EM pre‐1990)
(‐,+)Emp.Comp.Adv. in goods, not parts
(‐,+)Emp.Comp.Adv. in goods, not parts
(+,+)Emp.Comp.Adv. in parts & goods(typical G7?)
(+,+)Emp.Comp.Adv. in parts & goods(typical G7?)
Example of paradigms
ECA goods
ECA parts
Pure import substitution
Example of paradigms
ECA goods
ECA parts
Successful export‐led industrialisation
Example of paradigms
ECA goods
ECA parts
Assembly export‐platform
Germany’s GVC Journey0.6
0.4
Transportation equip
Other machinery
Electrical & Optical
Germany’s GVC Journey ‐ STYLISEDTransp.
Global sourcing boosts comp.adv.
in final
OtherMachOffshoring production
Electrical & Optical Offshoring production
US’s GVC Journey
‐0.1
0.2
Transp.Eq
Other machineryElectrical & Optical
‐0.4
Japan’s GVC Journey1.0
1.0
Transp.EqOther machinery
Electrical & Optical
0.0
China’s GVC Journey0.8
0.4
Transp.EqOther machinery
Electrical & Optical
‐0.4
Mexico
Mexico
EMs lowered tariffs; AEs much less
28
0
10
20
30
40
50
60
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
ThailandMalaysiaIndonesiaTaiwan,ChinaChinaPhilippinesKorea Rep.
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 advantagePARTS: 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: • aN in N • aS in S.
– S has comp.adv. in assemble iff aS<aN.
30
Intermed results: Spider
bbN = 1 + θ
bS = 1 - θ
N
S
NS
b
b
1
Part’s relative cost in S
Part’s coordination cost
Each part is a point in b, space.Part’s relative cost in S
Threshold part; assembly in S
Threshold part; assembly in N
Spider
32
bbN = 1 + θ
bS = 1 - θ
N
S
NS
b
b
1
Part’s relative cost in S
Part’s Offshoring cost
3 sets of parts, N, NS, S N: always cheapest in N S: always cheapest in S. NS: cheapest to co-locate
with assembly.
Cost minimisation
• Given sets N, S and NS chosen to min costs for given t• Assembly in S iff
• is greater than
33
dyyytybdyyayyN
SNSN
)()()()(1
dyyybdyyyttayyS
NSSN
)()()()(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’.
34
bbN = 1 + θ
bS = 1 - θ
N
S
NS
b
b
1
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 aS<aN.
35
2/)( bbtA 2/)( bbtR
2/)( bbtA 2/)( bbtR
Result: Offshoring “overshooting” of parts
Assembly in S tAssembly in N
b = 1
N
S
NS
Production technology and distribution of comparative advantage
36
Asymmetric parts production and exports with knowledge-led globalisation
37
