Sven W. Arndt

Globalization and the Open Economy

Does offshore sourcing by domestic producers destroy jobs? Does it lower wages? To a growing number of observers the answer to both questions appears to be affirmative. This paper examines the issue in the context of a conventional trade framework that has been amended to allow production to be disaggregated into its constituent activities. Offshore sourcing generally increases employment in an industry by creating more jobs in the remaining activities than are lost to sub-contracting. Offshore sourcing by labor-intensive importables industries raises both employment and wages. In general, offshore sourcing enables producers to strengthen their competitive positions against foreign rivals in the markets for end-products. When offshore sourcing involves simultaneous intra-product specialization in a labor-scarce importing country (like the United States) and a labor-abundant exporting country (like Mexico), employment and wages rise in both.

Globalization and economic development

A feature of the continuing integration of the world economy is the globalization of production and the consequent rise of trade in parts and components. Products are more internationalized and less identified with any particular country. Non-trivial shares of the value-added of many exports consist of imports and vice versa. Extension of the international division of labour beyond finished products offers developing countries a broader range of choices for industrialization. This paper explores the implications of these developments in the context of a standard trade model. Component specialization in a developing countrys import sector is shown to be superior in overall welfare terms to specialization in the integrated product. Output and employment are higher in the sector, but the wage-rental ratio is lower.

Globalization and the Gains from Trade

Among the major developments in the world economy in the last two decades has been the globalization of production. Products which once had clear national identities tend increasingly to be composed of parts and components from all over the world. On occasion, the “producer” of the final product appears to perform little more than an assembly operation (abstracting from design, management, and other critical functions).

Global Production Networks and Regional Integration

This paper examines the implications of cross-border production fragmentation in the context of regional integration, using both general- and partial-equilibrium approaches. It shows the conditions under which fragmentation converts a trade-diverting FTA into a trade creating one. It assesses the effect of fragmentation on the balance of payments and the sensitivity of trade flows to exchange-rate changes.

PRODUCTION NETWORKS AND THE OPEN MACROECONOMY

A key feature of globalization in the current era has been the rapid spread of cross-border production sharing in many regions of the world, including Europe, North America and Asia. The effects of these developments in the context of regional trade integration have been examined in the recent literature. This paper looks at their implications for regional monetary integration and exchange-rate policies. Cross-border production networks and the intra-industry trade associated with them affect exchange-rate behavior, balance of payments adjustment, and the transmission of shocks and disturbances. This paper examines the policy implications of regional production networks that (i) are confined to the countries of a given region, and (ii) involve a dominant extra-regional economy.

Trade, Production Networks and the Exchange Rate

This paper examines the effect of cross-border production sharing on the sensitivity of trade to the exchange rate and to other key variables. Theoretically, the response of a countrys exports to the exchange rate should decline as the share of exported components for use in the manufacture of its imports rises. Similarly, the response of its imports of end products should decline as the share of its exported components in those imports rises. The response of a countrys imports to domestic GDP should decline and the response to the exporting countrys GDP should rise as the share of imported components for use in the manufacture of exports rises. These propositions are tested for trade between the U.S. and Mexico, using OLS and VEC techniques and allowing for the impact of NAFTA. The findings broadly confirm the aforementioned priors. In addition to their implications for trade-balance adjustment, these results have potentially important implications for the choice of exchange-rate regime.

Trade Integration and Production Networks in Asia: The Role of China

This paper examines the implications of cross-border component sourcing and production networks for trade competitiveness and welfare. Offshore sourcing of components in which it has comparative disadvantage, enables a country to enhance its comparative advantage in the final product. This option provides emerging countries with an important alternative to capital accumulation and technical change as paths to economic development. In addition, production sharing changes the nature of trade-balance accounting and tends to reduce the sensitivity of trade flows to movements in exchange rates. This has important implications for trade policy and for the choice of exchange-rate regime. In the context of regional trade areas, for example, deeper integration allowing for production sharing has welfare effects superior to those of standard preferential trade liberalization.

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, crossborder 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.

DOHA DEVELOPMENT ROUND: REACHING BEYOND TRADE LIBERALIZATION

While the WTO process of multilateral trade liberalization encounters increasing resistance, in part because the most difficult issues have finally risen to the top of the agenda, market-based forces are contributing to international economic integration. One of the most potent is cross-border production networks. This paper explores the implications of such networks for trade policies and development strategies. It argues that participation in production networks requires trade policy adjustments and domestic reforms that can and should be undertaken unilaterally and that such changes will improve the climate for WTO negotiations. Copyright 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd

Adjustment in the process of trade liberalization: The U.S. and Mexico

Abstract Although many of the issues in North-American trade liberalization are reminiscent of those faced earlier by Europeans and by the United States and Canada, there are also some non-trivial differences. Divergences in economic structure are more pronounced. They affect the interplay of various sources of welfare gains and costs and are likely to make inter-industry and vertically integrated intra-industry trade more important Non-tariff barriers play a greater role in the present context and the welfare effects of preferntial elimination of quantitative restraints differ in important respect from those of tariffs. A free trade area, for example, which is clearly trade-diverting under tariff liberalization may be trade-creating under quantitative restrictions.