Transcript Comparative advantage

MBA34
Managerial Excellence – 1° Term
Globalization: facts, theory and consequences
The firm and its environment - Francesco Giavazzi
Class 21
Copyright SDACopyright
Bocconi 2004
SDA Bocconi 2006
1
We live in a
globally
integrated
world …
•
•
•
More integrated
than never
Both in goods
and financial
markets
But globalization
is not a novel
phenomenon
(Victorian age,
previous
globalization
period)
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Small countries are global,
big countries are not
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Most international trades occur among rich countries
which sell varieties of same goods to each other
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Leading exporters & importers:
bullet points
Germany world leading exporter, Usa world leading importer
China quickly getting close to the top of the ladder. India &
China with highest growth of exports. India with record
growth of imports
Germany (+200 bn$), China (+100), Japan (+80) and Russia
(+120): countries with biggest trade surpluses.
Their overall surplus of +500 bn$ is 60% of the US
merchandise trade deficit (830 bn$).
•
Other countries with big merchandise trade deficits: UK
(-130 bn) and Spain (-90 bn)
Merchandise trade balance partly offset by foreign account
balance in services trade
•
UK, Spa and Usa show a “+” (Usa=+70)
•
Ger, Jap and, to lesser extent, Rus and Chi have a ”-”)
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The bulk of world
trade is in
manufactures
•
About 60% of the
total, up from 50%
in 1985
Declining shares of
mining and other
primary products
(from 30% to 17%)
Shares of services
marginally up to
21%
•
•
–
Share of “Other
services” (which
includes IT services)
almost doubled since
1985
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Growth in trade partly boosted by lower transport
costs, particularly in the first half of the century
Transport and Communication Costs (1930=100)
120
100
80
Ocean Freight and
port charges per ton
of cargo
60
Air transport cost
per passenger mile
Cost 3 minute phone
call New YorkLondon
40
20
0
1930
1940
1950
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1960
1970
1980
1990
7
100
80
60
40
20
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1994
1979
1967
1962
1956
1951
1949
1947
1934
0
1930
Tarriffs as % of 1930 Tariffs
Trade (especially in second half of century) also
boosted by declining tariffs
8
Despite progress towards freer trade,
globalization is still very incomplete
Goods market
Law of one price does not hold
•
•
Price of similar goods more different across than within
countries
Not much evidence of decreasing price differentials over
time
Persisting home bias in consumption
•
•
•
•
US share of world GDP = .25; rest of world GDP = .75
With same preferences and full integration, expect GDP
share of imports = .75
Instead: =.12, one sixth of its frictionless value
About the same for EU as a whole and Japan
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Theory- Why are countries so eager to trade?
The comparative advantage principle
If countries trade so much and Governments are so eager to
embrace free trade, there must be a reason. There must be
GAINS FROM TRADE!
Why? Rationale from the principle of comparative advantage
(David Ricardo first, Eli Heckscher and Bertil Ohlin then).
Comparative advantage Even if the US is more productive than
the rest of the world in producing all goods (“has an absolute
advantage” in all productions), there may still be a case for
the US to specialize in producing a subset of all goods and
import the others
This is because of specialization gains: if the US specializes in
producing goods where its productivity advantage is
relatively bigger, this generates welfare gains. Resources are
therefore more efficiently allocated
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Comparative advantage has huge implications
•The more different countries are as to resource
endowments, the bigger the scope for specialization
• Countries will benefit from trade even if they are not low
cost producers
• Even poor countries may benefit from trade
• Each country specializes in those goods where, given
resource endowments, its comparative advantage is greater
• L-abundant countries will export L-intensive goods
(Chinese toys)
•K or technology abundant countries will export Kintensive tech-intensive goods (US  aircraft)
• Being closed to trade means being stuck producing goods
that could be more efficiently imported from abroad
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High RELATIVE (not absolute) productivity
means high exports
Source: Leontief (1953) - reprinted in Caves and Johnson
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2004
(1968)
“Readings in International Economics”
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 Diagram shows how strong comparative advantage
is
 US had absolute advantages in ALL industries
(the ratio of US to UK productivity everywhere
greater than one)
 However, still the case that in many industries
the U.K. exported more than the US
 Consistent with the theory of comparative
advantage: The industries where UK exports are
higher than US exports are in the low-productivity
industries where the UK disadvantage is less
sensible
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Is the Heckscher-Ohlin theory of
comparative advantage a good theory?
Look at two pictures: (UsChi) and (iit).
Then ask: Is comparative advantage a powerful theory?
• Yes, if goal is to explain trade between rich and poor
countries, such as Japan vs. China or US vs. Mexico
• No, at first sight, if goal is to explain trade between
similarly endowed rich countries
– Italians and French similarly well equipped to produce and export
wine. Yet Italians keep drinking Champaigne and French (may)
drink some Spumante.
– Why? Taste for variety and scale economies from specializing in
intermediate goods
So: is comparative advantage useless for understanding about
one half of world trade?
Not really. Subset of varieties in which each country
specializes often follows resource endowments
– Example: which cars do Germans and Italians sell to each other?
Mercedes and Fiat
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Policy implications
Under principle of comparative advantage:
• Free trade  max permanent GDP through
efficiency gains (higher TFP). These are static
gains from trade
• Trade restrictions = bad thing
There may also be dynamic gains from trade
• By trading with the world (multinationals, imports,
learning-by-exporting), a country may import
technical change, ability to reorganize production
and the like
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If trade so beneficial why do trade
restrictions exist at all?
Examples of trade restrictions
Tariffs: taxes on imports
 Quotas: quantity restrictions on foreign imports
 Voluntary Export Restrictions (VER’s): Foreign
producers “voluntarily” restrict quantities
 Administrative and technical standards
 Domestic Content Requirements (“buy Italian”)
 Government Procurement
• Why do they exist at all?
• To minimise adverse distributional effects of trade
• To raise revenue
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No-global economics
If trade according to comparative advantage is
so beneficial, why all this no-global fuss over
immiserizing effects of trade, exploitation of
the poor and the like?
In a nutshell, there is something to discuss but
evidence is not against trade. If anything,
quite the opposite
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Why no-globals may have a point:
international trade causes winners and losers
Trade between countries with different resource endowments,
though beneficial for the economy as a whole, causes
winners and losers
• Workers in exporting industries cash higher wages and
employment -- winners
– IT workers in the US, workers in mechanical industries in Italy
• Workers in import-competing industries suffer wage and
employment losses -- losers
– Steel workers in the US, textile workers in Italy
Comparative advantage theory says that winners gain enough to
compensate losers. But how is unclear in practice.
Government redistribution of part of the export proceeds
implied in principle. Rarely carried out in practice …
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Cross-country wage differentials – a proof of
exploitation?
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.. Or simply a proof of labor productivity
differentials?
Wages differ because labor productivity eventually differs:
high-productivity countries can still pay higher wages and
be competitive on unit costs. (Source: Trefler, 1993,
Journal of Political Economy)
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Who are the “trade winners” in poor
countries?
In poor countries the winners from international trade are the
owners of the resource available in abundant supply in the
opening-up country (Stolper-Samuelson theorem – a
consequence of Heckscher-Ohlin’s comparative advantage
model)
Who are these winners? Two categories of people
• The owners of the land where natural resources are located
and primary products are grown
– This worsens income distribution for they are rich to start with
• The plantation workers and small producers of primary
products
– This improves income distribution for they are the poor
So effect of opening up on income distribution in poor
countries not obvious (and may actually be positive)
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Chinese - U.S. trade consistent with Hecksher-Ohlin
U.S. export capital intensive goods and import labor
intensive ones (back)
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Extent of Intra-industry trade --more important for rich countries (back)
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