Globalization and the Gains from Trade

Summary

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).

Much of trade theory still ignores this phenomenon, perhaps in part because it may not alter the fundamental findings and conclusions of the traditional trade paradigm. In the realm of trade policy, governments have attempted to deal with the issue wherever it could not be avoided (as in the construction of rules of origin, for example), but there exists no coherent body of guidelines to help policy makers deal with the issue.

Among politicians and the public, there is a spreading perception that globalization, especially as it involves lowincome countries, is bad for workers’ living standards in advanced nations.

It is, thus interesting to ask whether globalization does alter the insights offered by traditional trade theorey. Is trade in parts and components just another part of trade and, hence, subject to the usual insights, or is it something special? This paper examines a selection of issues relvant to that question.

Among relevant considerations is the operative definition of comparative advantage. Under certain conditions, a country’s comparative advantage in final products is a function not only of internal endowments, but of differential access to imported parts and components. This finding is in itself not particularly novel or surprising, but it suggests outcomes that depart from those associated with the traditional theory of comparative advantage. It has a bearing, in particular, on the importance of certain types of preferential trade arrangements.

A second consideration pertains to the distribution of the gains from trade among countries involved in the globalized production of a product. The question of gains may be analyzed from the perspective of the nation, as well as at sectoral levels and in terms of factor returns. Prominent “losers” in advanced countries may be owners of factors of production used at the upstream end of a lenthy production process, while “winners” are factors of production involved in downstream production or final assembly.

This paper also examines the (two-way) relationship between globalization and factor accumulation, particularly of capital and human capital. From this perspective, globalization is seen as a cause of factor accumulation and thereby offers a means of endogenizing certain types of economic growth and development. Factor accumulation, however, also affects optimal globalization.

In dealing with these issues, the paper attempts to integrate the analytical aspects of foreign direct investment and of trade in goods and services. It attempts to identify the areas in which the results of traditional trade theory continue to hold and shows where and to what extent the introduction of globalization changes the outcome in significant ways.

Keywords

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

I am indebted to Robert McCleery for valuable comments.