MSc in International Management: Global Scenarios, Module 2 Report

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This report analyzes key aspects of economic globalization, focusing on international trade in goods and services. It explores the main drivers of globalization, including transportation and communication cost declines, and the impact of trade liberalization through organizations like the WTO. The report delves into the theory of comparative advantage, economies of scale, and the new trade theory, along with the gains and costs associated with free trade. It also examines trade policies, particularly the impact of import tariffs, and discusses offshoring, outsourcing, and the role of global value chains. The analysis includes the location of production, internalization versus outsourcing decisions, and concludes with a discussion of the pandemic's impact on GVCs, providing a comprehensive overview of macroeconomic concepts related to globalization and international trade.
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MSc in International Management
«Global Scenarios: Module 2 (Macroeconomics)»
Lectures 10 & 11
Globalization
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Economic Globalization
International exchange of:
Goods
Services
Factors of production
Capital (FDI)
Labor (Migration)
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Agenda
Trade in goods and services
Main drivers
Gains from trade
Debate over globalization
Trade policy: impact of import tariffs
Trade liberalization
WTO: main principles
Offshoring and outsourcing
Location
Internalization
The pandemic and GVCs
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TRADE IN GOODS AND SERVICES
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World trade over GDP
Source: World Bank
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Main drivers of economic globalization
Decline in
transportation &
communication costs
Decline in
tariffs/quotas & other
barriers to trade
WTO
Regional/Bilateral
trade agreements
(NAFTA, EU,
Mercosur, ASEAN, …)
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Why do countries trade?
Comparative advantage
Trade among different countries (North – South trade)
Economies of scale
Trade among similar countries (North – North or South
South trade)
Gains from trade
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Comparative advantage
2 key elements
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Countries are
different
if resources are used to produce units of one good,
the same resources cannot be used to produce
another good…
Scarcity of
resources
Opportunity cost
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Comparative advantage
comparative advantage in the production of a
good if opportunity cost lower compared to
other countries
A country is relatively more efficient in the
production of that good
Even a country with an absolute disadvantage in
the production of both goods always has a
comparative advantage!!!
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Absolute and comparative advantage
Absolute advantage:
One economy can produce a particular good more
cheaply than another country
Even if a country has an absolute advantage in
producing all goods, gains from trade may still be
realized
Comparative advantage:
The relative price of a good is lower than in another
economy
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Gains from trade
Trade is welfare improving:
Makes people better off: buy where goods are
cheaper
Countries specialize in the productions in which
they are relatively more efficient compared to the
rest of the world
Improves efficiency and welfare:
gains from specialization!!!
Growth!
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Sources of comparative advantage
Different technologies (Ricardian model)
Different factor endowments (Heckscher-Ohlin
model)
Idea
China and US produce textile products and airplanes
Textile industry is more labor intensive
Airplanes industry is more capital intensive
China has more labor than the US, while the US has
more capital than China (in relative terms!!!)
China will specialize in textiles, while the US in
airplanes
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Question
Why does lots of trade occur between relatively
similar countries producing relatively similar
goods?
Example: cars among developed countries
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New Trade Theory
Paul Krugman (Nobel Prize, 2008)
Idea
1. Although similar, the products have distinct
characteristics (differentiation)
2. If citizens of all the countries like to consume
many types of similar products and
3. if there are increasing returns to scale of
producing these goods it is convenient to
concentrate production on a limited number of
varieties
Intra-industry trade
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New Trade Theory – New Gains from Trade
Additional gains from trade
Firms take advantage of economies of scale →
they are more productive
Love of variety: more differentiated varieties for
consumers
More competition → lower prices
Adoption from the frontier + diffusion of
knowledge
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New New Trade Theory
Marc Melitz
Observation: only few firms export
These firms are more productive than domestic
ones
Intuition: trade is costly, hence only more efficient
firms can pay for those costs and get profits on
foreign markets
Positive selection through trade (gains from trade):
only more productive firms survive → industries
become more productive on average
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Is free trade good or bad?
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Gains
Specialization → expansion of production and
consumption possibilities → growth!!!
More competition → lower prices for consumers →
more efficiency → growth!!!
More variety
Higher productivity:
Economies of scale
Positive selection of firms growth!!!
Diffusion of knowledge and technology !!!
Spillovers
Incentives from increased competition
growth!!!
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Costs
Adjustment costs: short run costs
Creation vs. Destruction of Jobs
Retraining, relocating is difficult and costly
Winners and losers:
Impact on inequality
Losses concentrated; gains spread thinly
Structural change → structural unemployment
BUT…
Trade or technology? …
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TRADE POLICY
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Trade policy
A policy with an impact on the international trade of
goods and services
Tariff barriers:
Import tariffs/Export subsidies
Non-tariff barriers:
Quotas
Regulations
– …
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A tariff in a small country
A tariff is a tax on imported units
drives a wedge between the price paid and the
price received
Price buyer – price seller = tax
unlike sales tax, tariffs discriminate between
products based on where they are made
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A tariff in a small country
Distortions lower productivity
Small vs. large country
Impact on the international market
Who pays the tariffs?
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A tariff in a small country
Consumers are worse off
They pay more and can consume a lower amount
Domestic producers are better off
They face less competition
The Government gets tariff revenues
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A tariff in a small country
Net impact on the economy is negative:
Lower total welfare
inefficient allocation of resources
distortions in consumption decisions
distortions in production decisions
Reduction in trade
Retaliation and trade wars
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Summary
Drivers of economic globalization
Reduction in transport and communication costs
Trade liberalization
Why countries trade:
Comparative advantage
Economies of scale
Heterogeneity across firms
Trade policy
Impact of an import tariff
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TRADE LIBERALIZATION
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Trade liberalization
Unilateral
Multilateral: World Trade Organization
Preferential trade agreements
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Prisoner dilemma in trade policy
The allocation of resources is more efficient
when tariffs are zero
If a country (large) imposes a tariff, the foreign
country is negatively affected
Risk of retaliation
In case of retaliation, both countries are worse
off
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Prisoner dilemma in trade policy
Nation A’s
choices:
Protect
Liberalise
Protect Liberalise
Nation B’s choices:
A’s welfare B’s welfare A’s welfare B’s welfare
A’s welfare B’s welfare A’s welfare B’s welfare
2 2
1 4
4 1
3 3
unless they can coordinate policies
internationally, they will be stuck at the
inefficient northwest box
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Prisoner dilemma
Prisoner dilemma
Both countries would be better off without tariffs,
but no one has the incentive to reduce them
Bad equilibrium!!!
Multilateral negotiation can help in solving the prisoner
dilemma
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World Trade Organization
Main purpose:
Make trade as free as possible…
– … so long as there are no undesirable effects …
because this is important for economic
development and well being
Main agreements:
GATT (Goods)
GATS (Services)
TRIPS (Property rights)
– …
www.wto.org 32
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WTO – basic principles
Trade without discrimination
Most-favored-nation (MFN): treating other people
equally
Grant someone a favor and you have to do the same
for all other WTO members
Exceptions allowed
National treatment:
Imported and locally-produced goods should be treated
equally — at least after the foreign goods have entered
the market
www.wto.org 33
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WTO – basic principles
Freer trade: gradually, through negotiation
Predictability:
Tariff binding
promising not to raise a trade barrier can be as
important as lowering one
Transparency
Promoting fair competition
In limited circumstances, forms of protection are
allowed (countervailing duties)
Encouraging development and economic reform
www.wto.org 34
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WTO: Exceptions
Important exceptions
Safeguard measures:
protect a specific domestic industry from an increase in imports
which is causing or threatening to cause serious injury to the
industry
Article XXI: security exceptions
Member can take “any action which it considers necessary for
the protection of its essential security interests” in times of
emergency in international relations”
Article XXIV GATT:
preferential trade agreements are allowed
Countries have to notify them to the WTO
Risk of creating contraposed trade blocks
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WTO – Dispute settlement
Dispute settlement is the central pillar of the
multilateral trading system
Role: Enforcing the rules
secure and predictable trading system
clearly-defined rules and timetables
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WTO – Dispute settlement
Principles:
Equitable
Fast
Effective
Mutually acceptable
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WTO – Dispute Settlement: Timing
60 days Consultations, mediation,
etc
45 days Panel set up and panellists
appointed
6 months Final panel report to parties
3 weeks Final panel report to WTO
members
60 days Dispute Settlement Body
adopts report (if no appeal)
Total = 1 year (without appeal)
60-90 days Appeals report
30 days Dispute Settlement Body
adopts appeals report
Total = 1y 3m (with appeal)
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WTO – Dispute Settlement
First stage: consultation (up to 60 days)
Second stage: the panel (up to 45 days for a
panel to be appointed, 6 months to conclude)
If the panel decides that the disputed measure does
break an agreement or an obligation, it
recommends that the measure be modified
according to WTO rules
Both sides can appeal the report
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WTO – Dispute Settlement
The case has been decided: and now?
If the country loses, it must follow the
recommendations of the panel report
If complying proves impractical, the member will be
given a “reasonable period of time” to do so
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WTO – Dispute Settlement
If it does not comply:
negotiations with the complaining country to
determine mutually-acceptable compensation
If after 20 days, no satisfactory compensation is
agreed, the complaining side may ask for
permission to retaliate
Temporary!
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OFFSHORING AND OUTSOURCING
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Definitions
Outsourcing = Movement of an activity
outside the firm
Offshoring = Movement of an activity to a
different country
Could be
Subsidiary abroad (FDI → MNE)
Subcontracting with another firm (Arm’s-length
trade)
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Global fragmentation of production
Production abroad: Location and Internalization
Offshoring:
production abroad
Outsourcing:
externalization of
production
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Offshoring
Horizontal offshoring: same tasks performed
abroad and domestically
Vertical offshoring: different tasks performed at
home and abroad
Global value chains
Mixed strategies
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Global Value Chains
Measures of GVCs
Trade in value added
FVA – Foreign value added (Backward)
Value added by foreign countries in a country’s
exports
Imported goods and services incorporated into
country’s exports
DVA – Domestic value added (Forward)
Value added produced by the country in the exports
of another one
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Global Value Chains
𝐹𝑉𝐴 + 𝐷𝑉𝐴
𝐸𝑥𝑝𝑜𝑟𝑡𝑠
World Bank, World Development Report 2020, https://www.worldbank.org/en/publication/wdr2020 47
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GVC participation and productivity
World Bank, World Development Report 2020, https://www.worldbank.org/en/publication/wdr2020 48
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Determinants of FDI
World Bank, World Development Report 2020, https://www.worldbank.org/en/publication/wdr2020 49
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LOCATION: WHERE?
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Location: where?
Once a firm decides to produce abroad, where
it is producing???
Product characteristics
Economies of scale
Disintegration costs
Customization
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Location: where?
Once a firm decides to produce abroad, where
it is producing???
Countries’ characteristics
Distance
Trade barriers
Resources
Human capital
Skills
Quality of institutions
Local economic conditions
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Trade in components shows three interrelated production hubs
World Bank. 2017, Measuring and analyzing the impact of GVCs on economic development, Washington, D.C. : World Bank Group. 53
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Low wages vs. low production costs
Developing countries deeply involved in GVCs have low unit labor costs but no low
wages, 2010 (Unit labor costs: ratio of average wages to GDP per capita).
wages
Unit labor
costs
Developing countries
deeply involved in
GVCs
Other developing
countries
World Bank. 2017, Measuring and analyzing the impact of GVCs on economic development, Washington, D.C. : World Bank Group. 54
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INTERNALIZATION VS OUTSOURCING
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Internalization
In-house vs. outsourcing
Full control → higher costs, but full control on
quality and technology
Outsourcing (contract) → lower costs, but lower
control on quality and technology (contracts)
Relevant factors:
Incomplete contracts
Countries’ structure: quality of institutions
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Internalization
The configuration of the GVC is determined by:
Complexity of the input needed
Standardized vs. customized input
Ability to codify transactions
Need of specific investment to produce the input
Capabilities in the supply base
Specific skills vs. generic skills
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HEALTH SHOCKS AND GLOBAL VALUE
CHAINS
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Health shocks and GVCs: previous evidence
Reshoring: a rise in domestic production
geographical diversification: less imports from
affected areas
GVC widening: rise in number of suppliers for
each product imported
Near-shoring: more import from suppliers in the
geographical neighbourhood
GVC resilience: short-run disruptions
Anirudh Shingal, Prachi Agarwal, “Global value chain responses to previous health shocks: Lessons for Covid-19
VoxEU, Dec 8, 2020.
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