Panel 2: Europe´s answer to the global changes in the division of labour

Globalisierung, Arbeitsteilung, Arbeitsorganisation, Welt, EU-Staaten, Globalization, Division of labour, Work organization, World, EU countries

Heterogeneous Firms and Trade: Testable and Untestable Properties of the Melitz Model

This paper sets out a basic heterogeneous-firms trade model that is closely akin to Melitz (2003). The positive and normative properties of the model are studied in a manner intended to highlight the core economic logic of the model. The paper also studies the impact of greater openness at the firm-level and aggregate level, focusing on changes in the number and type of firms, trade volumes and prices, and productivity effects. The normative effects of liberalisation are also studied and here the paper focuses on aggregate gains from trade, and income redistribution effects, showing inter alia that the model is marked by a Stolper-Samuelson like effect. A number of empirically testable hypotheses are also developed. These concern the impact of greater openness on the firm-level trade pattern, the variance of unit-prices, the stock market valuation of firms according to size, and the lobbying behaviour by size.

Hysteresis In Import Prices: The Beachhead Effect

International economists typically assume that temporary real exchange rate shocks can have only temporary real effects -and no effect at all on the underlying structure of the economy. This paper shows that even in a simple "off-the-shelf" industrial organization model, this assumption is unfounded; if market-entry costs are sunk, exchange rate shocks can alter domestic market structure and thereby have lasting real effects. In other words, a sufficiently large exchange rate shock can cause hysteresis in import prices and quantities. This simple idea has strong implications for exchange rate theory (Baldwin and Krugman 1986 shows this), for trade policy (Dixit 1987a discusses this), and for the estimation of trade equations as the present paper shows. To show that the theoretical point is not just empirically empty theorizing, we present evidence which suggests that the recent dollar overvaluation is an example of a hysteresis-inducing shock. To this end we demonstrate that the pass-through relationship shifted in a manner that 13 consistent with the nature and timing of the market structure changes predicted by the model. In particular, we find evidence that the structural break occurred during the rising dollar phase rather than In 1985 as is commonly asserted. A direct test of the model is not performed due to data limitations.

Agglomeration, Integration and Tax Harmonization

This paper considers tax competition and tax harmonization in the presence of agglomeration forces and falling trade costs. With agglomerative forces operating, industry is not indifferent to location in equilibrium, so perfectly mobile capital becomes a quasi-fixed factor. This suggests that the tax game is something subtler than a race to the bottom. Advanced 'core' nations may act like limit-pricing monopolists toward less advanced 'periphery' countries. Consequently, integration need not lead to falling tax rates, and might well be consistent with the maintenance of large welfare states. "Limit taxing" also means that that simple tax harmonization - adoption of a common tax rate - always harms at least one nation and adoption of a rate between the two unharmonised rates harms both nations. A tax floor set at the lowest equilibrium tax rate leads to a weak Pareto improvement.Tax Competition; Tax Harmonization; New Economic Geography; Geography; Agglomeration; Trade; European Integration

A Domino Theory of Regionalism

Regional liberalization sweeps the globe like wildfire while multilateral nude talks proceed at a glacial pace. Why are countries eager to liberalize regionally but reluctant to do so multilaterally? The answer of the GATT-is-dead school is that multilateralism is too cumbersome for contemporary trade issues, This paper proposes a very different answer. Recent regionalism is caused by two idiosyncratic events multiplied by a domino effect. The triggering events - the U.S-Mexico ETA and the EC's 1992 programmes had nothing to do with GATT's health. The domino effect is simple. Political equilibria, which balance anti- and pro-membership forces, determine governments' stances on regional liberalization. Domestic exporters to regional blocs are a powerful pro-membership constituency. An event that triggers closer integration within an existing bloc harms the profits of nonmember exporters, thus stimulating them to boost their promembership political activity. The extra activity alters the political equilibrium, leading some countries to join. This enlargement further harms nonmember exporters since they now face a disadvantage in a greater number of markets. This second round effect brings forth more promembership political activity and a further enlargement of the bloc. The new political equilibrium is marked by larger regional trading blocs. In the meantime regionalism appears to spread like wildfire.

Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade

This paper addresses the final steps to global free trade -- the political economy forces that might drive them, and the role the WTO might play in guiding them. Two facts form the departure point: 1) Regionalism is here to stay; 2) the motley assortment of regional trade agreements is not the best way to organise world trade. Moving to global duty-free trade will require a multilateralisation of regionalism. The paper presents the political economy logic of trade liberalisation and uses it to structure a narrative of world trade liberalisation since 1947. The logic is then used to project the world tariff map in 2010, arguing that the pattern will be marked by fractals – fuzzy, leaky trade blocs made up of fuzzy, leaky sub-blocs (fuzzy since the proliferation of FTAs makes it impossible to draw sharp lines around the 3 big blocs, and leaky since some FTAs create free trade ’canals’ linking the blocs). The paper then presents a novel political economy mechanism – spaghetti bowls as building blocs – whereby offshoring creates a force that encourages the multilateralisation of regionalism. Finally, the paper suggests three things the WTO could do to help multilateralise regionalism.

Trade And Industrialisation After Globalisation’s 2nd Unbundling: How Building And Joining A Supply Chain Are Different And Why It Matters

Revolutionary transformations of industry and trade occurred from 1985 to the late-1990s – the regionalisation of supply chains. Before 1985, successful industrialisation meant building a domestic supply chain. Today, industrialisers join supply chains and grow rapidly because offshored production brings elements that took Korea and Taiwan decades to develop domestically. These changes have not been fully reflected in “high development theory” – a lacuna that may lead to misinterpretation of data and inattention to important policy questions.

Factor Market Barriers are Trade Barriers: Gains From Trade in 1992

The European Community's economic integration by 1992 is predicted to have large economic benefits. According to traditional trade theory, the gains will come only with permanent resource migration and significant factor price changes (since in principle all trade barriers have already been removed). Yet, it seems unlikely that the 1992 reforms will be completed, if they do indeed result in factor movements large enough to substantially alter factor rewards. This paper presents a more optimistic view. It argues that factor market integration can result in economic gains, even without capital and labor migration. The basic argument is simple. For some types of goods, it is cheaper to conduct trade on an intra-firm basis, rather than an inter-firm basis (for instance roughly half of US imports are intra-firm, Helleiner [1981]). In such industries, any factor market barrier that raises the cost of foreign control of local firms also raises the cost of intra-firm trade. Consequently, removing such barriers can lead to gains from trade. The 1.0. trade literature points out that intra-firm trade requires direct foreign control which need not involve direct foreign investment (Helpman and Krugman [19851). Therefore, 1992 can logically lead to gains from additional intra-firm trade, with little additional capital or labor migration.

Managing the Noodle Bowl: The Fragility of East Asian Regionalism

The paper argues that East Asian regionalism is fragile because (i) each nation's industrial competitiveness depends on the smooth functioning of "Factory Asia" - in particular for intraregional trade; (ii) the unilateral tariff-cutting that created Factory Asia is not subject to WTO discipline (bindings); (iii) there is no "top-level management"; to substitute for WTO discipline, to ensure that bilateral trade tensions - tensions that are inevitable in East Asia - do not spill over into region-wide problems due to lack of cooperation and communication. This paper argues that the window of opportunity for East Asian vision was missed; what East Asia needs now is management, not vision. East Asia should launch a "New East Asian Regional Management Effort" with a reinforced ASEAN+3 leading the way. The first priority should be to bind the region's unilateral tariff cuts into the WTO.Asian integration; free trade agreement; best practices; Asian development