Production Sharing and Singapore’s Global Competitiveness

Singapore has made spectacular progress in recent decades in pushing its economy into the world\u27s top ranks. One important payoff has been a substantial rise in living standards. Among the main drivers behind this accomplishment have been entrepot trade, which exploits an important natural comparative advantage, on the one hand, and enlightened education, social, and economic policies, which have built up man-made comparative advantage based on human capital, on the other

International sourcing and factor allocation in preference areas

Creation of the North American Free Trade Area (NAFTA) has focused attention on trade in intermediate goods and on offshore sourcing in the context of preferential trade liberalization. Although intermediate goods trade as a general phenomenon has been thoroughly examined in the literature, its role in the trade of preference areas has been relatively minor until the advent of NAFTA. Intermediate goods play a key role in the theory of effective protection, the application of which to preferential trade areas (PTAs) suggests that the protective or anti-protective of preferential trade liberalization may depend on the relative roles of intermediate and finished goods covered by the exercize. This paper combines insights from several strands of the literature in order to ascertain the extent to which the welfare effects of preferential trade liberalization are influenced by the presence of intermediate products. This is done in the specific context of preferential trade liberalization between an advanced, industrialized country like the United States and a developing, industrializing country like Mexico. One of the policy "problems" NAFTA was supposed to alleviate was that of the northward migration of unskilled workers. If NAFTA could speed up industrialization and economic growth in Mexico, it might generate enough new jobs to reduce, and perhaps ultimately eliminate, the flow of Mexican workers to the United States. Such a development was widely believed to be welfareenhancing from the U.S. perspective. The maquiladora phenomenon had demonstrated the extent to which specialization, not along finished product lines, but in terms of production stages and processes, could exploit the peculiar complementarities of the two countries, create jobs south of the border, and bring welfare gains to both countries. The critics of NAFTA, on the other hand, saw the issue less in terms of complementarities than of competitive substitution and rivalry. They saw labor migration from Mexico as one type of threat to American workers and globalization as another. The welfare effect of globalization depends on whether it occurs in a country's exportables or importables industries. This paper focuses on globalization in the importables sector, because it is the less straightforward of the two cases. The issue is examined in the context of preferential trade liberalization between two economically unequal partners. It shows that trade liberalization which leads to offshore sourcing may reduce welfare in the advanced country

Policy Challenges in a Dual Exchange Rate Regime

It is known that the effectiveness of macro policies depends on the exchange-rate regime. Pertinent models have typically considered either fixed or floating rates rather than mixed regimes. In recent years, however, the dollar has floated against most currencies, while being fixed against the yuan. This paper argues that a flex-price, dual-rate model consisting of the U.S., China and the Eurozone, combined with distinct adjustment patterns in tradables and non-tradables sectors and a tendency for policy makers to treat inflation in housing as pure asset inflation, provides a plausible explanation of the great moderation and its aftermath

The Great Moderation in a Dual Exchange Rate Regime

In the early nineties, the U.S. economy was emerging from a brief slump, monetary policy was easy, and economic activity recovered quickly during the decade, with GDP eventually reaching and then passing the consensus full employment level. Yet aggregate inflation remained surprisingly subdued. This moderation in prices at the aggregate level persuaded policy makers to allow the easy-money stance to continue in spite of the presence of inflation in non-tradables and in housing and construction in particular. This paper uses a flex-price, mixed-exchange rate model to examine some of the major contributing factors to economic developments in the two-decade period that ended in the financial meltdown and the great recession. It argues that Chinese exchange rate manipulation and China’s preference for holding dollar reserves were important contributing factors. On the U.S. side, failure to understand the importance of differencial inflation patterns in tradables and non-tradables sectors, and especially failure to see inflation in housing and construction as goods rather than asset inflation, allowed monetary expansion to last much longer than it should have

Trade Diversion and Production Sharing

This paper examines the repercussions of cross-border production sharing for the welfare effects of preferential trade liberalization. In a general-equilibrium context, a free trade agreement (FTA), which incorporates production sharing, raises the likelihood of welfare improvement. Thus, two members of a free trade area, who each have comparative disadvantage in the production of a final product relative to a non-member, may nevertheless enjoy net trade creation if they jointly possess comparative advantage in key components of that product. At a minimum, cross-border production sharing reduces the trade-diverting elements of an FTA. It follows, that rules of origin, viewed as constraints on cross-border fragmentation, augment the negative, trade-diverting elements of free trade areas

Intra-industry Trade and the Open Economy

This paper explores the implications of cross-border production networks and vertical intra-industry trade for macroeconomic adjustment and for the effectiveness of monetary and fiscal stabilization policies. Vertical intra-industry trade introduces direct links between countries’ imports and exports and thereby affects the manner in which trade balances respond to variations in exchange rates and to global shocks more generally. The precise effects depend on whether the direct link runs from exports to imports or vice versa. In the U.S., for example, exports of auto parts and components rise with an increase of imports of passenger vehicles from Mexico. This produces a change in balance-of-payments adjustment similar to high capital mobility and raises the likelihood that a fiscal expansion will lead to appreciation rather than depreciation of the currency. In China and Mexico, on the other hand, a rise in exports of assembled end products raises imports of parts and components. The differences in outcome are more pronounced under floating rates, because of the role of the exchange rate in the adjustment process. Direct export-import links undermine the impact of the exchange rate on the trade balance, hence necessitating larger changes in rates in order to achieve a given degree of adjustment and raising exchange-rate volatility as a result. In the case of both types of exchange-rate regime, vertical intra-industry trade weakens the response of the trade balance to price and income shocks

Government Policy and the Decline in U.S. Trade Competitiveness

This chapter examines recent developments in the U.S. competitive position from both economywide and sector-specific perspectives. At the former level, competitiveness may be measured by comparing the average of domestic prices or costs with those abroad, after allowing for changes in exchange rates; while at the disaggregated level, the price and cost comparisons are carried out with respect to sectors, industries, and products

Policy Choices in an Open Economy: Some Dynamic Considerations

Decision rules for stabilization policy in an open economy are examined under alternative specifications of the balance of payments. In particular, distinction between interest-sensitive debt capital and equity capital which responds to an activity variable alters the comparative static properties of instrument assignment. Various aspects of dynamic adjustment are further investigated in a context in which time is endogenous and in which the decision process minimizes a criterion function. It is shown that traditional one-to-one pairing of targets and controls may be inferior to assignment of clusters of instruments to some targets for specified time intervals