Trade Diversion

The preliminary program for January’s AEA meetings is online. I’ll post some trade highlights when the conference comes around.

The agendas for the Princeton IES Summer Workshop (June 28–30) and the NBER Summer Institute trade session (August 1–4) are online.

Christina Romer has a nice introduction to the “strong dollar” mantra and the economics of exchange rates in the NY Times. She concludes:

Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.

Doug Irwin has posted the preface to his forthcoming Ohlin Lectures book, Trade Policy Disaster: Lessons from the 1930s, on his website.

• Development Impact: A new blog on impact evaluation from the World Bank.
• People are not property: Michael Clemens on skilled migration.
• Significant: xkcd on publication bias and science journalism.

John McCain got in trouble in some circles for saying that the iPhone is “built in the USA.” Leo Gerard corrected him by saying “the iPad and the iPhone are made in China, they’re not made in America.”

In a world of vertical specialization, what does “made in” mean? The product itself is pretty clear on the issue: “Designed by Apple in California. Assembled in China.”

[Photo by Chen Zhao]

Apple fails to mention that they’re assembling components manufactured in Taiwan, but you can forgive them for that. Maybe labels should just default to “Made in a series of places.”

Previous editions:

• Are iPhones “made in China”? Measuring value added in trade flows
• Globalization & iPods

Trade finance has been a hot topic since the “great trade collapse” began in 2008. We’ve had job-market papers, numerous VoxEU columns, and an AEA session. At the Atlantic, Liam Casey, CEO of a supply-chain services provider, says that trade finance is overdue for innovation:

[M]ost banks still push antiquated trade finance products — most notably, letters of credit. This instrument is based on an old supply chain model that was risky and involved huge amounts of money and long delivery times. Financial institutions had to extend a line of credit against raw materials inventory or decide when to make payments to sellers on behalf of buyers.

Today’s supply chain transaction times are much shorter and transaction amounts are much smaller. Information, product and cash flows are all interconnected. Controlling the flow of information allows you to control the flow of products, which in turn leads to a controlled flow of cash. Such short supply chain cycles make financing much easier. It reduces the working capital required to make a product, and with no inventory stocks, fast transit times and the best inventory visibility in the industry, risk is dramatically reduced. The impact of this new model on global commerce is huge, facilitating more and more startups to get into business with less capital and less risk.

Adapting to change and staying flexible is how businesses stay relevant – especially in the supply chain and technology sector. Chinese mainland banks are well positioned to take advantage of opportunities in trade finance because they understand China, they understand commerce and the supply chain, and they know where to look for risk in the pre-shipment stage of the supply chain. With regards to the post-shipment side of the business, where the Western banks are comfortable, Chinese banks such as China Merchants Bank are rapidly learning global business systems and developing their expertise. Western banks need to move fast to catch up. They need to develop new trade finance products to stay relevant and adapt in today’s market.

[HT: LWS]

Julien Martin and Isabelle Mejean describe quality upgrading by French firms in response to different forms of international competition:

What is the impact of low-wage countries’ competition on the quality of high-wage countries’ exports? To answer this question, we develop a new method that uses firm-level data to measure quality changes in sectoral exports. Over 1995-2005, we measure a 11% increase in the mean quality of France’s aggregate exports, driven by a reallocation of demand in favor of higher quality producers. The phenomenon is significantly more pronounced in markets where the penetration of developing countries has increased while it is negative where firms face increased competitive pressures from high-wage countries. These results are consistent with within-product specialization along the vertical dimension. They suggest that, over the period, France has specialized in the production of higher quality goods. In our data, around one fifth of the measured quality improvement in France’s aggregate exports is attributable to low-wage countries’ competition. In turn, its increasing specialization in higher quality goods has limited France’s market share loss over the period.

They’ve written a VoxEU column summarizing their findings.

Three pieces worth reading in full:

• Simon Lester, refuting Daniel Altman, explains some of the problems with preferential trade deals and why the WTO won’t be made obsolete by the proliferation of PTAs.
• Mike Konczal summarizes a new paper (pdf) by David Autor, David Dorn, and Gordon Hanson that analyzes effect of import competition on U.S. local labor markets that were differentially exposed to the rise of China trade between 1990 through 2007 due to differences in their initial patterns of industry specialization.
• David Warsh discusses Peddling Protectionism: Smoot-Hawley and the Great Depression, Doug Irwin’s new book, in the context of explaining Smoot-Hawley’s role in the Great Depression.