Summary

This document analyzes economic security, with a focus on the liberal approach to globalization, trade, and interconnectedness. It explores the concept of interconnectedness and interdependence, and how technology, societal factors, and international politics affect economic relations. The Ricardian and Heckscher-Ohlin models, which explain international trade, are also examined.

Full Transcript

òEconomic Security 25/09/2024 Economics of security regard the protection by loss, at a national interest level Security related to the fact that countries do not came up first as they want in many sectors the fact that Germans can do better electric vehicle from us can be perceived as a threat t...

òEconomic Security 25/09/2024 Economics of security regard the protection by loss, at a national interest level Security related to the fact that countries do not came up first as they want in many sectors the fact that Germans can do better electric vehicle from us can be perceived as a threat to national security Economic security stand to the interception between various elements Draghi report **[The liberal world order and trade integration ]** Globalization as the interconnection and interdependence among people, firms and institutions its economic dimension depends on forces that determine the costs and the opportunities: - Exchanging good and services most positively affected - Exchanging ideas - Doing face-to--face activities Those elements are of curse affected by technology, societal factors, culture, ideology and international politics Economic backbone of the world order and at the basis of the international institutions that govern this regime - Trade makes specialization profitable rising income and welfare - Trade is not zero-sum game but a win-win at the global level anyone produce what their best to produce Any exception and distortion to the rule of free trade in theory reduces welfare this have to be justified by political reasons (mostly used) and some economical Public interventions can be motivated either by market failures or by non-economic objectives: by adding distortions to distortions, however, they may be welfare reducing. **The** **Liberal approach** Globalization is conceived as the evolution of interconnected networks formed in a fragmented polity of multiple actors, where the use and the threat of force are not valuable Liberalism holds that interdependence does generate reciprocal vulnerabilities, but it also creates opportunities for cooperation. A progressive self-enforcing entanglement tends to emerge that supports both Peace allow countries to interconnect getting closer integration bring peace and vice-versa in the liberal view Paul 2021 core ideas of the liberal international order - International openness - Multilateralism and rules-based relations - Democratic solidarity and cooperative security - Progressive social purposes for both domestic and international societies International institutions, constitutional democracies and economic interdependence appear all necessary for international peace and for a 'good life' internationally Some predictions of the liberal theory - Democratic trading partners are likely to engage trade domestic political economy - Less likely to escalate conflicts overall gains of trade + domestic political economy - More likely to find arrangements to set common rules **Traditional theory of international trade** exist some welfare gains from international trade: if a country can trade products at price ratios different from those in the domestic prices, it will be better off by exchanging goods/services than in self-sufficiency. Divergence in prices between autarky and free trade is what is important to make trade valuable. In that case welfare improvements is what move away from autarky equilibrium Traditional assumptions of the simplified market: - Constant returns to scale in production - Perfect competition among firms - No frictions in the market of factors and good/services - No externalities - Factors of production are internationally immobile - Price flexibility Concept of comparative advantage in international trade the absolute advantage does not matter, under free trade each country tends to specialize in the product where they have a relative advantage. Even a country that has an advantage in doing everything can gain from concentrating its resources on what it does relatively better: there are gains from specialization in production "gains-from-trade theorem" = if a country can trade at any price ratio other than its\ domestic prices, it will be better off than in autarky -- or self-sufficiency. - Free trade\>autarky - Restricted trade\> autarky - In small countries free trade\> restricted trade **Ricardian Model** (one of the models that explain international trade not mutually exlusive) - Perfect competition - No trade costs - Fixed endowment - International immobility factors - 2 countries with different productive technology - 2 goods (Cheese and Wine) - Labor is the only factor of production - Constant return to scale Due to the principle of comparative advantage (the relatively low cost of a good compared to other countries in autarky): A country has a comparative advantage in producing a good if the opportunity cost of producing it in terms of the other good is lower in that country than in the other country is not possible to have a comparative disadvantage in evert good There are 2 laws of comparative advantage: 1\. POSITIVE: predicts what countries can be expected to do, that is exporting goods in which they have a comparative advantage 2\. NORMATIVE: suggests what they should do, that is if permitted to trade, a country will gain through specialization Domestic production is bounded by the available amount of labour. The opportunity cost of Cheese in terms of Wine is the units of Wine that could have been produced with the resources employed in the production of Cheese. If the unit labor requirement in the production of wine aLW= 6 and the one of cheese aLC= 2 Labor productivity in wine 1/aLW, as aWL\>aLC producing wine requires more labor units than producing cheese The opportunity cost of cheese in terms of wine is the number of wine units the economy would have to give up producing in order to produce more cheese the opportunity cost of cheese in terms of wine is aLC/aLW (2/6=1/3) Comparing 2 countries with different technology in autarky +-----------------------+-----------------------+-----------------------+ | Unit Lab | Home | foreign | | | | | | Require | | | +=======================+=======================+=======================+ | Cheese | 2 | 1 | +-----------------------+-----------------------+-----------------------+ | Wine | 6 | 2 | +-----------------------+-----------------------+-----------------------+ Foreign is more efficient in producing both goods (absolute advantage in both). Foreign is relatively more efficient in wine, whereas Home is relative more efficient in cheese aHLC/aHLW= 1/3, aFLC/aFLW=1/2 Ricardo shows that even if a country has a comparative advantage (can produce more output) in both lines of production, is beneficial for both countries to specialize in the one they have the higher comparative advantage and trade!! there's a comparative advantage in the production of a good if the country is more productive in the production of this good rather than another one. In autarky, the relative price of Wine (Cheese) in Foreign is lower (higher) than at Home. Opening up for trade allows Home producers to sell cheese at higher price in Foreign, while Foreign producers can start selling Wine at a higher price in Home Wages would become higher in the industry with a comparative advantage and all workers would work in the higher-wage industry ➔ each country specializes in the industry in which it as a comparative advantage Trade equalizes the relative prices in a two countries to a level that is somewhere between the autarky prices. All labor is employed in each country, but workers move from the relatively less productive sector to the more productive one ➔ domestic and international specialization of labor There is a win-win in the sense that a country would win and none of them will loose This model is contested by non-economists which think it can't work in today's global world.\ Differences in this model and others lie in the assumptions: 1. Marginal costs don't change with the level of production: but with non-constant marginal costs comparative costs are not so defined BUT with non-constant costs countries' behavior is not so different except that countries produce both goods. 2. Complete specialization on one good is not realistic (NB read the point above) Ricardian model can still be applied in case of multiple countries and 2 goods, or multiple goods and 2 countries, but not with multiple goods and countries and if so only under very simple assumptions. BUT this doesn't mean that is useless in realistic assumptions, comparative advantage always plays a role (correlation). **Deardoff 2005** a difference in relative autarky prices implies the potential to increase world output by reallocating resources within the two countries, he discussed assumptions that are both consistent and not with comparative advantage correlation - CONSISTENT: presence of restrictive trade policies, real trade costs, all type of goods and services, all preferences - NOT CONSISTENT: domestic distortions (externalities or market power) and increasing returns à complicate the story but doesn't reverse it **Heckscher-Ohlin model** While the welfare improving effects of moving from autarky to trade belong to many traditional theories, the Ricardian model puts emphasis on relative productivity and cost opportunity. International differences in relative productivity are the source of the gains from trade in a Ricardian model technology. In the Ricardian theory the difference is only in technology, in the Heckscher-Ohlin the difference is also in some other elements and factors of production (factors endowments) is about the quantity of capital and countries differ in the relative endowments of these factors of production, each country can specialize in the production of the product that uses more intensively the factor that is relatively more abundant The Heckscher-Ohlin theorem states that a country has a production (export) bias towards the good that uses intensively the factor with which it is relatively well endowed. Assumptions: - Two countries, two goods and two factors of production (labor and capital) - Same level of technology and taste between countries - Differences in factor endowments - Factors are mobile between industries but not countries Some predictions derived from this theorem (for example Country A endowed with labor, Country B with capital; goods automobile a lot of capital and clothes a lot of labor): - **Heckscher-Ohlin theorem:** a country tends to export the good which uses the factor the country is relatively well endowed (has the most) A exports clothes and imports automobile - **Stolper-Samuelson theorem:** states that an increase in the relative price of one of the two goods raises the real return of the factor used intensively in producing that good and lowers the real return of the other factor a tariff on clothing would raise real wages and reduce real return on capital - **Rybczynski theorem**: if good prices are constant, and there's an increase in the endowment of a factor, this causes an increase in the output of the good that uses more that factor and a decline in the output of the other good immigration would raise the output of clothing and reduce the output of cars - **Factor-price equalization theorem**: under certain conditions, free trade is sufficient to bring about the international equalization of factor prices trade alone under conditions would equalize wages in A and B and rates of return on capital A and B Can they be generalized? Important because these 4 prepositions are at the core of international trade theory. Results: \- Dimensionality matters = many of the results from the basic 2x2 model are lost with higher dimensions. \- The Heckscher- Ohlin theorem survives as a correlation. \- The Stolper-Samuelson and Rybczynski theorems survive but they only apply to some factors or goods but not to all. **New trade theory gains from economies of scale, product variety and increase competition** **Intra-industry trade** Other assumptions/theories are helpful to explain phenomena such as intra-industry trade and of trade between similar countries: if consumers love to have a wider choice of products and/or if firms can exploit economies of scale when serving an international larger market, there are additional gains from trade Specialization is a net phenomenon there's a lot of variety, and different products compete at the margin one with another countries specialize in slightly different versions of the same product and exchange the same stuff (Intra-industry trade: is important to explain why countries that produces cars for example also import them) The net trade flows reveal anyway some kind of economic specialization based on comparative advantages even in similar countries This leads to global value chains, where within the same sector there is an ultra-specialization over components specialization happen to a very small level, technology allow us to split and slice up production into very small components and markets Final goods are the assemblage of intermediate products that can be produced locally or abroad interdependence along production process Global Value Chains lead to a vertical two way trade but is possible to distinguish inward net flows of intermediate products and outward net flows of final products the net gain of a GVC advantage the country that stand at the end of the chain GVCs create an interdependence between countries along the production process When we're talking about multinational firms it became more complicated the specialization benefit firms that can produce d6ifferent components in different countries through offshoring, this can happen both with other independent firms and with MNC, difference between European companies (can be Chinese companies located in italy or Italian companies in China) China was an only assembling country importing components Anyway, GVCs have only a minimal change to the conclusions from traditional models 26/09/2024 Trade and specialization create welfare and gain every country can specialize In reality some production have increasing returns to scale the more you produce the more competitive you are, magnification of competition to obtain advantage of scale (specialization and concentration of production in very few firms located in few countries) Increasing return to scale is connected with the distribution of fixed costs as the overall output rises, the fixed costs get distributed over a larger number of units ➔ firm's average costs of production decline. Increasing return to scale leads to concentration of production in very few firms located in few countries industrial specialization is created by a path dependence When you have variety the products compete in a limited number of differentiated products **monopolistic competition** (When we have both increasing returns to scale in each variety and consumers' love of variety, the result is several small firms producing a limited number of differentiated products), surviving of little monopolies for every variety in the industry (not much difference in price), this doesen't really change what we said but helps us understanding the situation. The happiness of people coming from variety lead to even more gains opening the market as buyer you are happy because of more variety, as a producer if you produce something very similar to others but in a more inefficient way you're at fail risk Example Home market before trade Foreign market before trade Integrated market after trade ------------------- -------------------------- ----------------------------- ------------------------------- Tot sales of cars 900,000 1,600,000 2,500,000 n\. of firms 6 8 10 Sales per firm 150,000 200,000 250,000 Average cost 10,000 8,750 8,000 price 10,000 8,750 8,000 In equilibrium, international trade enables firms to serve a larger integrated market and reduce their average costs of production, while consumers increase the range of varieties and welfare improves. Consumers can buy more varieties and pay a lower price for each one: gains from trade. In the integrated larger market, some firms will go out of business and the surviving ones get larger and more efficient. General welfare increases because of the consumers' gain If firms can move their location and trade is costless, firms will choose where to locate production: international integration allows firms to concentrate production while keep serving several foreign markets with concentration forces and agglomeration effects there will be a concentration of several producers in the same place (economies of scale, can be countered by dispersion forces such as congestion and competition for land ) Concept of externalities doesn't affect the price (pollution, knowledge), if you have positive spillovers this lead to concentration of firms (silicon valley, industrial districts), not everybody can stay together (equilibrium of agglomeration and dispersion forces). When you open a market some areas get super specialized and some areas loose all their production This is at the base of regional economics and economics geography if factors of production can move, production can be concentrated in specific areas (open market lead to a huge redistribution across sectors and across countries Once you allow companies to specialize more welfare, lower prices Trade is good but if you specialize in low value and technology products is not the best better to play in the type of specialization you have (this can lead to closures). Countries specialize in activities that can have either higher or lower value added. Moreover, income inequalities across countries may remain in place when there is no perfect equalization of the returns to the factors of production trade remains beneficial to all with respect to autarky, but trade may lead to large re-distributive effects (at the level of country, sector, factor) Paul Krugman comparative advantage is about specializing in what they do best (countries do not compete, firms do) Misconceptions about disadvantages of the open market: - A nation gains from trade only when its firms are more competitive than the foreign ones - Foreign competition is unfair when it is based on low wages - Trade exploits a country if its workers receive lower wages than those paid abroad Country-by-country specialization is determined by the combinations of factors: different local endowments of the factors of production, different local technologies, different production methods of goods/services, strength of internal economies of scale and agglomeration effects, frictions and barriers to the circulation of factors and goods/services, both across countries and sectors \-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-- **[The liberal Order and globalization ]** WTO (WTO agreements) organization based on agreements (tariffs on products), create to reduce taxes (in a reciprocal, proportional and predictable way). This intergovernmental institution represents a limitation to the game of power and it is a cornerstone of the rule-based post-war liberal order. The liberal order and trade globalization have grown together under the aegis of the WTO. Main principles trade is good and any distortion reduce welfare, reduce the state intervention to create a level-playing-field for competing firms is the necessary companion (political you want to protect who loose but creating distortions there is not possibility to prediction) - Distortions alter trade patterns and reduce such gains - A level-playing-field for competing firms is the necessary companion of trade liberalization Over time WTO expanded to trade-related areas movement of skilled workers, intellectual property and trademarks, and trade governance, reduction of all the frictions that reduce trade (every sector that involve behind the border issue) WTO principles: - reciprocity in liberalization ➔ magnifying mutual gains - non-discrimination and national treatment ➔ 'most favorite nation' clause (no favorite nation, country cannot discriminate between their trading partners with free trades areas or special favorable access granted to developing countries (preferential trade agreements are an exception)) - negotiation with a 'single undertaking' (i.e., every item of the negotiation is part of a whole and indivisible package, if you want one than you have to take the rest, nothing is agreed until everything is agreed) ➔ no 'differentiated integration' - predictability and transparency ➔ trade barriers should not be raised arbitrarily different actors can see trade agreements in a different way - exporters value foreign marke access and make pressures to offer domestic market access in change - import-competing producers fear the competition from more efficient foreign producers and oppose resistance to remove import tariffs foreign and domestic exporters meet each other in order to obtain reciprocal market access the single undertaking prevent countries to obtain what they want ignoring others Crisis of the WTO rules, gains, legitimacy Economic globalization occurred under a political environment putting the liberal order principles and the WTO at the core. Recently, instead, nationalism, selective protectionism and political rivalries have put the WTO and the liberal order under threat. There are new policies that try to protect national economy new return to industrial policies, is trade really good for trade? Those same countries that became economically strong thanks to the liberal market now are trying to change the system to control it Reflecting of the evolution of the liberal market we can identify different phases of trade and globalization: Economic globalization started growing after WW2 thanks to: 1. Grater political integration political alliances, GATT (General Agreement on Tariffs and Trade) liberalization during the Bretton Woods period end transformation of GATT in WTO in 1994 2. Technological progress lower transportation costs and speed, lower communication costs (the evolution of those forces leads to different phases of globalization) Two phases until the middle 2010s correspond to two unbundling processes Baldwin unbundling (consumption and production is not linked you can consume things produced very far lead to specialization, due to the reduction of costs) The first one (**1950-1990**) regarding the link consumption-production (sectoral specialization, industrial agglomeration in North; intra-industry trade N-N; inter-industry trade N-S), the second one (**1990-2020**) leads to GVC regarding the link production-production (trade became very important between producers) During the 1 unbundling: is associated with lower transport costs and tariffs (the production of final goods dispersed internationally), however communication costs are still high and physical proximity lower them (creation of local agglomeration into large factories and industrial districts) The G7 nations increase their share of world GDP and world trade. Their specialization in the advanced products, together with some two-way trade and technology exchanges among them, is strengthened ➔ economic divergence N-S Trade was still considered good the S couldn't get richer than N, globalization is good for the S but not for the N In the 2 unbundling (associated with lower communication costs, transportation costs and tariffs) The ICT (information and communication technologies) revolution makes it economical to separate manufacturing stages and to unbundle factories geographically (the production became dispersed in long GVCs, different in wages internationally make it very profitable). New trade agreements and policies directed to facilitate doing business internationally facilitate the emergence of international supply chains. Many developing nations gain from entering these GVCs (although at the low end of the chain) ➔ economic convergence N-S Trade is still good but is way better for developing countries south is starting competing with the north ![](media/image2.png) Has globalization economically strengthened the countries willing to challenge the liberal order? YES Several developing countries were admitted into the WTO under a differentiated treatment: they were allowed some room of maneuver but, at the same time, they became production platforms for Northern MNCs (multinational corporations) once these emerging economies developed, their interests changed and started developing their own companies, retaining more value added, accelerating the caching up (use of unfair practices and challenging the overall regime) This process accelerated in the expansion of globalization during the 1990s the post-cold war era facilitated the diffusion of GVC and MNCs. Firms became interconnected via either sourcing\ contracts or direct investment - Northern MNCs were interested in producing new international rules facilitating doing business and protecting international investment. - Developing countries wanted to attract foreign capital, and they signaled their commitment by parInternational integration required to revise/coordinate those\ domestic (non-tariff) measures restricting trade ticipating in trade negotiations, experimenting legal transplants and protecting foreign business International integration required to revise/coordinate those domestic (non-tariff) measures restricting trade. Domestic (non-tariff) measures need to meet legitimate domestic policy goals but the might reduce trade taxation, competition policy, protection of International Property Rights, consumer protection, technical standards (sanitary, phytosanitary), subsidies Non-tariff measures may even undo the effects of tariff reductions Standards create an another cost (we adopt the country with the bigger market), even standards can create an advantage, if you want to be the leader in standard you also need to be the leader in technology (EU problem) Hence, integration went towards the adoption of international rules on the trade-related consequences of 'beyond the national border' measures international trade agreements started covering new economic areas (work of the WTO) Agreements to remove tariffs and NTM (non-tariff measures) are similar but with a different logic the cooperative adoption of common technical standards ensure the non-discriminatory treatment of domestic and foreign products and prevent market segmentation Construction of a new idea of trade agreements, considered as the main cooperative tool: - To strengthen the principles underpinning the liberal order and protect its values - To improve welfare (win-win gains from trade) - To protect MNCs Not all tariffs have been removed sensitive sectors still protected, also developing countries have a differentiated limited liberalization Most importantly, the WTO agreements provide for **trade defense remedies**: countries can impose **contingent import tariffs (contingent protection)** to address unfair business practices or to **retaliate** against a country that does not comply with the WTO commitments countermeasures take place against wrongdoing firms and countries that fail implement agreements (Countries can unilaterally impose temporary and proportional tariffs on imports when facing circumstances that **violate fair competition)**: - Foreign firms dumping activities antidumping duties, tariffs that goes on products dumped , is against companies not necessary because of countries - Foreign firms receiving state support countervailing duties, tariff against produced in a country, is against a country - Abrupt increase in imports in a product safeguards (erga omnes) These trade defense measures can be imposed only after a complaint is lodged at the WTO dispute settlement bodies, pending its adjudication (rule-based dispute settlement system, goal of deterrence and restoration) If a country violates its commitment in the WTO agreements, the penalized country can lodge a complaint at the WTO DSS /dispute settlement system) to be authorized to **retaliate** by imposing tariffs on selected imported products trade remedies / retaliation - Trade remedies offset the unfair price advantage of the foreign producers that penalize domestic import-competing producers in the same sector - Retaliation associated in responding to a country that is using tariffs illegally, reacting to something, the other country can bring a case to the WTO even regarding a retaliation, reduces domestic imports of sector A to respond to higher tariffs imposed by the foreign country on its imports in sector B Retaliation must impose a proportional damage: the retaliating country can/must choose what imported products to hit and estimate the impact. Retaliatory measures can be used against trade remedies that are\ considered excessive/unjustified. But retaliation regards any measure restricting trade or generating unfairly cheap exports with no WTO-consistent motivation or, in general. **violating the WTO rules**. There is the possibility of retaliating economically against political coercion in EU an ANTI-Coercion Instrument in 2023 to react when "*a third country is seeking to pressure the Union or a MS into making a particular choice by applying - or threatening to apply - measures affecting trade or investment*" **Trade wars** can emerge as the result of an ever growing series of restrictive measures (retaliatory and remedies), covering larger and larger shares of bilateral trade In 2018 the former USA president Trump accused China of unfair trade practices and IPR theft(Initially, the US imposed tariffs on imports of solar cells to offset Chinese industrial subsidies. Later, the US imposed tariffs on iron and steel under the justification that imports threatened American national security) countries are asking for more intervention in the global trade ROW (Rest of the World) ![](media/image4.png) (China decided to hike tariffs falling on the goods produced in the counties with the strongest trump support) There exists an additional **exception to the GATT rules** in Art XXI(b) that allows the WTO members to breach their WTO obligations for purposes of **national security (used by Trump) Problem: Who is deciding what is in a country's national security interest reviewable and actionable?** Historically, there has been self-restraint of WTO members in invoking such exception (for narrow purposes and in exceptional circumstances) as WTO members hesitated to initiate legal actions in deference to national security and sovereignty becoming more common in recent years (Russia-Traffic in Transit case) WTO protect national security interest but there's the risk of cascading of national security claims - The contended issue from an economic viewpoint: can fair economic competition be considered a threat to domestic national interests? - The contended issue from a political viewpoint: is the security clause a white blanket for any trade restrictions motivated by any political purposes? Reemerging of borders in the economic arena more economic fragmentation 2/10/2024 **[Globalization backlash and economic nationalism]** ![](media/image6.png)tb2010 people started complaining about globalization, Various surveys suggest that people have become more skeptical about the benefits of free trade, but also less positive about limiting imports This happened mostly in western Europe nationalist parties, civil society mobilization Not also countries started being unsure about globalization also people in democratic societies, this opposition have been mobilized by political parties that have made economic integration a more salient issue in political discourse, besides sentiment also policies started changing ![](media/image8.png) There are some structural explanations that can be reasons to this: - economic aspects: previous acceleration of globalization, de-industrialization (the structural change of specialization was too fast), technological change, and growing inequality - non-economic transformations: end of Cold War, rising immigration, cultural value change (changing of societies), challenges to sovereignty (political problem of cooperation and coordination between countries, BREXIT, integration means less sovereignty) Challenges to the liberal claims arise from both the radical left (for growing inequality) and the conservative right (for erosion of sovereignty). Moreover, liberals have often deviated from core principles and adopted measures inconsistent with their own paradigm. Hard to distinguish empirically demand-side \[above, comes from people\] and supply-side \[party manifestos, came from parties\] factors behind this backlash there are just many parties of the demand is actually that high? The transition to specialization is traumatic dealing with this is important **China syndrome** China admitted into the WTO, but is huge so every time it does something is important the specialization in China had huge influence on US (similar things also happened for Japan in 80s) The sheer size of China and other emerging countries, together with tolerated distortions practiced by their\ governments, altered significantly international prices: the **transition process** entailed **large scale re-allocation** of workers, capital and knowledge across sectors and firms, even in the advanced countries. The Pareto optima nature of free trade is a comparative result in equilibrium, but economic theory says little about the transition the transition can be pretty hard for the people The China syndrome is associated with a remarkable strengthening of the anti-trade political forces in advances countries considering also national security concerns and military rivalries (similar stuff happened with Japan but it was an ally) In the 90s the anti-globalization movement was about exploitation of the N to the S now is about protecting the North, domestic concerns for the condition of western economy China syndrome alleged relationships between manufacturing decay in the US and China trade surpluses Huge social cost in the US for the economic integration of China the US have deliberately moved out from the manufacturing market for specializing in financial and housing market (2008 bubble), the transition was painful for the manufacturing market Serious empirical studies estimated the impact of China competition on the US economy and identify some partial equilibrium negative effects (but the positive effects of cheaper purchases were neglected): - **Closure of manufacturing plants** (Bernard, Jensen, Schott 2006) and decline in employment (Acemoglu, Autor, Dorn, Hanson, Price 2016; Pierce, Schott 2016) in the most trade-exposed industries; - **Lower lifetime incomes** and greater job churning for workers in more trade-exposed industries (Autor, Dorn, Hanson, Song 2014) - **Lower employment** and higher long-run unemployment in more trade-exposed local labor markets (Autor, Dorn, Hanson 2013); Many interpretations can be split in four main groups: - Globalists consider economic convergence good, although it implies some 'unfavourable' redistribution in advanced economies - mild critics argue that China failed to reciprocate access and comply with the rules, but the WTO, all in all, works fault is on China - severe critics argue that China's failure to reciprocate and respect the rules reveals serious problems in the WTO system fault on the WTO - Isolationists economic integration should be reconsidered altogether China's growth trajectory and its state-led development strategy challenged the liberal international order by co-opting only some of its principles (Garcia Herrero 2024 link). As noted by Paul (2021), China used its growing wealth to improve its position in the debate and in the 'new' global order China integration happened without liberal values (China changed with Xi, miscalculation and political change) now they want to reset the system, challenging the liberal international order In 2018-19, the US imposed tariffs on about \$350 billion worth of Chinese imports, and China retaliated by levying tariffs on an additional \$100 billion worth of imports (China doesn't import so much from the US as the US does from China) US tariffs affected around 18% imports (2.6% of US GDP) and China's retaliation impacted 11% of its imports (3.6% of its GDP). ![](media/image10.png) The US anti-trade stance was broader in scope and directed even to long-standing partners Mexico/Canada The US started questioning NAFTA (replaced by the USMCA). The main object, also beefed up by the Democrats in Congress, was the automotive sector, after the offshoring of US and EU production to Mexico.: the rules provided for an increase in the **regional content** required for duty-free treatment (pro USMCA) and a minimum wage requirement in production, as well as **Mexican labor regulations** subject to the dispute mechanism (pro US). to be treated as duty-free goods should have a regional content (UE companies cannot offshore to Mexico and then export in US as if it was Mexican goods), they also need to have salaries like in the US EU The Inflation Reduction Act of 2022, by the Biden administration, strengthened the US industrial policy for electric vehicles by providing aid for consumption and local investment to reduce inflation and the cost of energy, you have subsidies to buy electrical cars/batteries that are produced in USA or countries with a free trade agreement Besides subsidies, tariffs have been imposed on the electric vehicle supply chain, waived under tight **local content requirements** valuable for FTA countries. The EU and South Korea do not have such agreements and complained Risk of an economic war with EU, so Biden stated "*Well, that was added by a member of the United States Congress who acknowledges that **he just meant allies; he didn't mean, literally, free trade agreement**. So, there's tweaks that we can make that can fundamentally make it easier for European countries to participate and/or be on their own. There is no fundamental -- it was never intended, when I wrote the legislation - I never intended to exclude folks who were cooperating with us. That was not the intention", the EU is starting defining USA as an aggressive competitor* The US administration has justified its unilateralism and aggressive policy out of the growing dissatisfaction for the WTO DSS, accused of being ineffective and too complacent with China. US unilateralism sold as a response to failing multilateralism The EU rejected unilateralism (the WTO needs to be reformed,\ not dismissed) while China argued that the liberal order needs a reform (and the WTO with it). Both concluded that US has been undermining multilateralism via its WTO bashing. Fight between the US and the WTO, **two concomitant and partially overlapping phenomena** the increasingly confrontational approach adopted in specific trade issues and an overall attack to the principles of the liberal order US Ambassador R. Lighthizer WTO Appellate body has failed to function The USTR report has a section titled "Appellate Body **Errors** in Interpreting WTO Agreements Raise Substantive Concerns and Undermine the WTO'. The US claims 4 alleged errors in assessing the validity of US trade remedies (2 AD duties, 1 CV duties, 1 safeguards) **The US claims that trade remedies should be less constrained by WTO judicial decisions security measure** **The use of trade remedies by US has been under attack from trade partners: between 2002 and 2019, two-thirds of the disputes (accounting for 30% to 60% by import coverage) filed against the US were about US remedies** **WTO law seems a bit old as it encompasses inadequate disciplines with regard to globalization-related issues case of extraterritorial subsidies (financial contributions granted to recipients who are not\ located in the territory of the granting state)** **In December 2022, the EU introduced a regulatory regime for foreign subsidies (Regulation on Foreign Subsidies, see Nagy 2023) the European Commission established countervailing duties on imports\ from certain Chinese enterprises located in Egypt as they are considered as having a negative effect on competition within the single market.** Introduction of the Regulation of Foreign Subsidies from the WTO to act on very new globalization issues Being the globalization backlash and China syndrome as they are, there are more general questions that can be addressed from a strictly economic viewpoint: 1. **Does protectionism serve national interests?** 2. **What are limits to the national security interests clause?** 3. **Is there a slippery slope risk from unilateralism to economic nationalism?** 4. **Competition vs. competitiveness debate (Draghi report) already happen in the 80s but against Japan (military ally)** **1** ![](media/image12.png)Trade restriction are effective in reducing trade flows but they do increase wealth (only valuable politically?) for someone the problem is trade imbalances looking at net trade so we need to see if the restrictions actually affect the ultimate causes of the imbalances ![](media/image14.png)Tariffs do reduce trade on the targeted goods on the trade balance it doesen't have much effect, increase trade diversion (other countries started replacing Chine in US imports, very complicated depend on international political relations), the US deficit with China is still present (the US model is based on consumption, the Chinese model is based on investments, codependency), the problem is on US overconsumption Even with Tariffs US imports grew Obstfeld 2024 misconception about imports, they have not being imposed by a foreign country, they have a domestic source, economic isolation is not a solution The protection of specific sectors can be explained by political economy considerations. But the repercussions on the rest of the economy matter. Protectionism 'protects' the beneficiaries what about the others? (more jobs lost than saved) **2** Challenging national security relevant industries is a security threat, in 2021 US invoked the GATT Art XXI to impose steel and aluminum tariffs (same Russia have done towards Ukraine, and Saudi Arabia and UAB to Qatar in 2017) Concerns: - the range of issues described as relevant for national security interests may expand too much (i.e., abusive claims) - national security concerns are hardly debatable in court/WTO DSS (although the actual range of judicial review is still discussed) Those concerns highlight how countries may distort trade for reasons not related to trade, relationship between trade and peace is two way mechanism from economic competitors to rivals, any economic partner can be considered a rival Cohen 2020 *'National security collapses upon itself, becoming synonymous with national advantage or\ disadvantage'* **3** The populist protection of specific domestic interests contributed to **a nationalistic rhetoric calling for more unilateralism and state intervention state measures as a response to threats to sovereignty** **Countries should choose their own solution fitting national features and preferences to alter patterns in their favor** There are countries that want to influence the trade system - stronger trade defense and FDI restrictions countries supervise economic transaction , even in the EU (unicredit case) - lower dependence from abroad pandemic influence - strategic foreign alliances with like-minded parties - greater use of economic sanctions - more active industrial policies **Rodrik's dilemma** (similar to a macro economical trilemma) political trilemma to explain why, in democratic contexts in which international integration is on the rise, nationalists have become increasingly vocal It indicates how **nation states** (territorial-jurisdictional entities with independent powers of making and administering the law) and **democratic political systems** (political institutions representative and responsive to mobilized groups) are not compatible, if taken together, with **highly integrated national economies** (factual argumentation) The observed differences in nations' preferences make political\ unification and global solidarity (necessary for governing hyper-globalization) impossible. Short of a common governance, he argued, globalization should be scaled back. "*We must acknowledge and accept the restraints on globalization that a divided global polity entails. The scope of workable global regulation limits the scope of desirable globalization. Hyper-globalization cannot be achieved, and we should not pretend that it can.*" he does not advocate isolationism, his argument\ has been borrowed by the skeptics and nationalists As said before, trade integration is beneficial, but the compliance with WTO rules represents a straitjacket.\ Moreover, the economic specialization of the country determines its level of welfare If national preferences are not aligned and compliance is hard to enforce, the smooth functioning of the system becomes problematic. It is so possible that countries try to set between the two extreme, isolationism and multilateralism, as long as this remains compatible with the system Economic openness becomes highly managed at the political level Even assuming that this does not jeopardize the global system (but it does), issues remain with preferential integration: - How to choose the partners? like-minded countries (on what issues), economic similar (in what terms), legally trustworthy (according to what ranking) - How to strike a balance between protection and incentives to selected sectors, consumer welfare and sectors open to competition? **Managed trade** preferential trade agreements, driving trade and specialization, EU is applying a taxation to goods produced in countries without a carbon tax to companies (contentious issue EU/USA, in USA they don't like taxes ideologically), national preferences ends up in measure that create distortions **Paradox of economic nationalism and globalization** while each nation would like to 'be sovereign', it\ would like to ensure that foreign frameworks do not penalize their own firms abroad **4** Competition VS competitiveness Firms in different countries compete against each other in the attempt at serving global markets: competition is part and parcel of free trade and trade integration (Krugman: companies compete not countries) ***Krugman** is very critical on Trump's ideas, he sustain classical international economic theory: In economics, the line you hear most is Trump's declaration that 'trade wars are good, and easy to win'* \... *The truth is that trade wars are bad, and almost everyone ends up losing economically. If anyone 'wins', it will be nations that gain geopolitical influence because America is squandering its own reputation* **Mario Draghi 2024**: *For a long time, competitiveness has been a contentious issue for Europe. In 1994, the Nobel-prize-to-be economist Paul Krugman called focusing on competitiveness a "dangerous obsession". His argument was that long-term growth comes from raising productivity, which benefits everyone, rather than\ through trying to improve your relative position against others and capture their share of growth. The approach we took to competitiveness in Europe after the sovereign debt crisis seemed to prove his point. We pursued a deliberate strategy of trying to lower wage costs relative to each other - and, combine this with a procyclical fiscal policy, the net effect was only to weaken our own domestic demand and undermine our social model.* *But the key issue is not that competitiveness is a flawed concept. It is that Europe has had the wrong focus.\ We have turned inwards, seeing our competitors among ourselves, even in sectors like defense and energy where we have profound common interests. At the same time, we have not looked outwards enough: with a positive trade balance, after all, we did not pay enough attention to our external competitiveness as a serious policy question.\ **In a benign international environment, we trusted the global level playing field and the rules-based international order, expecting that others would do the same. But now the world is changing rapidly and it has caught us by surprise.*** Draghi also referenced the idea of economic security the categories of security interests and the discretionary part of what the country 'considers' a security concerns. On the security side, the UN Charter authorizes the Security Council to mandate 'complete or partial interruption of economic relations' **Heath 2020**: ***National security rhetoric is increasingly infiltrating global economic affairs... The global economic order and the concept of national security are today deeply intertwined and difficult to disentangle.*** ***Major geopolitical disputes now play out within trade and investment institutions rather than outside them. In particular, and in contrast to the Cold War period, major strategic rivals \... are also economic competitors within the same multilateral trading system. At the same time, the concept of national security has transformed \... Today, national security has evolved to address a range of threats*** *The new national security presents an acute challenge for international economic institutions. **Contemporary security policy provides a deep reservoir of potential justifications for departing from ordinary trade and investment rules.*** *At the international level, many major trade and investment agreements contain a general exception for security measures. \... **Many of these exceptions, including those in the foundational multilateral trade agreements, are often argued to be 'self-judging': this relatively ungoverned zone of discretion\ contrasts starkly with ordinary trade and investment adjudication*** 3/10/2024 **[Testing the liberal hypothesis ]** **Liberal school**supports the trade-peace relationship on the basis of trade-related welfare maximization **Realist school** focuses on security maximization concerns associated with economic dependence and vulnerability The WTO agreements, in turn, allow nations to protect their national security interests and suspend their commitments, thus recognizing the existence of a **trade-off between welfare and security** objectives Theoretical/empirical discover the correlation between trade relationships and conflict (positive or negative), correlation doesen't mean causation something the direction of correlation is not clear We want to discover the correlation war/trade and the direction of the causation disentangle the causation mechanism At the theoretical level, the causal negative impact of trade on conflict is associated with the **foregone gains from trade in case of war explore what is the correlation between trade relationships and conflicts, and what causal mechanisms are at play** Martin, Meyer and Thoenig 2008 Occurrence of **militarized interstate disputes (MIDs), with at least 1000 deaths of military personnel**, between country pairs divided by the total number of country pairs. **Trade openness is the sum of world trade (exports and imports) divided by world GDP**. In the Graph doesen't show a clear correlation different periods different kinds of relations, not linear and clear As put by Thoenig (2024), the empirical analysis of the liberal hypothesis is marred by technical difficulties because the correlation between trade openness and military disputes may be spurious and driven by: - RC (reverse causation) the impact of war on trade and trade policies (e.g. economic sanctions) - OV (omitted variables) omitted factors influencing conflict and correlated with trade (i.e. distance) Trade and war are, to use technical terms, endogenous variables in the empirical analysis. Unless the first effect can be distinguished from the others, a) one cannot talk of causation, b) the estimates of the impact are biased we have an endogeneity problem (Endogeneity refers to where the effect of an independent variable on a dependent variable cannot be casually interpreted because it includes omitted causes leading to biased (i.e., inconsistent) estimates) To make sure the correlation we can find with empirical research we have to take in consideration **omitted factors** and external factors other elements have to be taken into account **Sample selection** is also problematic wars and inter-state military conflicts are infrequently observed because not all disputes escalate into a military confrontation, not every country can be considered the same, countries self-select in trade and into conflicts Various different results - Early empirical studies found that trade inhibits political conflicts, in line with the liberal idea. - Barbieri (1996) found that interdependence is positively related to dyadic conflict once trade asymmetries and national vulnerabilities are accounted for - against the liberal hypothesis Simple correlations and simple studies do not allow to identify the consequences of endogeneity: - OV (omitted variables) third factors causing both peace and trade - SS (Self-selection) countries' self-selection into peace/conflict - RV reverse causality Observable third factors can be added in a multivariate estimation so that the relationship between trade and peace is found conditional on these controls ➔ some early quantitative studies addressed only this OV issue, causal conclusions can however be drawn only if all the endogeneity concerns are addressed To solve the omitted variable problem is adding variables control for other factors Martin Meyer Thoenig 2008 provide a possible explanation why there is no clear cut evidence in favor of the liberal hypothesis. Their main insight is the distinction between the impact of bilateral and multilateral economic relations difference between bilateral and globalized multilateral trade (lack of interdependency), the liberal theory is naïve They show that a pair of countries with more bilateral trade has a lower probability of a bilateral war, but multilateral trade openness has the opposite effect because multilateral liberalization reduces the degree of bilateral inter-dependence. This explanation has a testable prediction: globalization decreases the probability of global conflicts, but it increases that of bilateral conflicts. MMT test whether bilateral and multilateral trade have opposite effects on the probability of bilateral military conflicts over 1950-2000. Gravity model of trade the larger are the countries the more they trade, the closer they are they trade (if two countries are in trade lower more than if the two countries were distant if two countries are in war they trade less) They tried to comprehend at first if war is bad for tradethey show that conflicts increase the bilateral (more than multilateral) trade costs, thereby reducing exchanges. This is to show that war does lead to foregone benefits, the tenet of the liberal hypothesis, being at war reduces trade for many years (after 5 years the effect is dissipated zero stars in the table) The second part of their work is about testing the effect of bilateral and multilateral trade on the probability of being in a conflict they test the predicted opposite effects of bilateral and multilateral trade on conflicts by addressing various endogeneity concerns, and they conclude as anticipated. They used the Correlates of War project database the main developed variable is the occurrence of a MID between a pair of countries. Each MID is coded with an hostility level ranging from 1 to 5 (the analysis fall on values from 3 to 5) ![](media/image16.png) Of the 536,381 dyads only 2,390 (0.45%) have been engaged in a MID In the attempt to control for all relevant factors behind the probability of ending up in a conflict, the model contains various controls (such as the number of peaceful years since the last MID, bilateral distance and contiguity) distance is a very important element (it influence both trade and conflict) MMT starts by showing that conflict is bad for trade, as posited by the liberal school: if it wasn't, the liberal hypothesis (associating lower trade as the opportunity cost of war) would be meaningless. Trade costs are due to non-policy-related variables (bilateral distance, geo contiguity, similarity in languages, colonial links),\ policy-related factors (pre-existing trade agreements), and to militarized conflicts. The first test, thus, regards the estimation of the impact of a bilateral conflict on bilateral trade flows. **1.1 Testing the impact of a bilateral conflict on bilateral trade: negative** Estimated impact *≈* exp(coefficient)-1: -22% (coeff: -0.244), - 38% (coeff -0.485) Model 1 and 2 regard imports Model 3 and 4 bilateral trade **1.2 Testing the impact of being in conflict on multilateral trade: reject** ![](media/image18.png) **2 Impact of trade on probability of being in conflict** In the attempt to control for all relevant factors behind the probability of ending up in a conflict, the model contains various controls (such as the number of peaceful years since the last MID, bilateral distance and contiguity) We want to discover the y2 and y3, controls contain all the omitted variables, y0 is distance Model's predictions ➔ Negative coefficient for bilateral trade; positive\ coefficient for multilateral trade. Countries do not have the same probability of escalating a dispute into war because disputes are more likely among proximate countries. MMT investigate whether the impact of bilateral and multilateral trade\ on conflict is stronger for the countries that are close. Two empirical strategies: - restrict the sample to country pairs that are most likely to have a dispute - full sample with interaction terms between distance and trade (distance used as moderating factor) Prediction If disputes decrease with distance, one expects a positive sign on the interaction term between distance and bilateral trade: typically trade reduces the chances of conflicts (negative coeff), but less so the more distant the countries (positive coeff). Conversely, a negative sign is expected for the second interaction term between distance and multilateral trade different models (distance in a moderating factor) ![](media/image20.png)**Col 1**, only contiguous\ countries.\ **Col 2**, contiguous pairs\ with a bilateral weighted\ distance below 1000 km.\ **Col 3** full sample,\ interaction terms between\ distance and trade\ variables interaction distance x bilateral trade (negative) or multilateral trade (positive).\ **Col 4**, as col 3 with long\ list of controls which are\ possible determinants of\ MID and correlated with\ trade (more variables taken into account)\ **Cols 5 and 6**, as col 4\ with country pair fixed effect in logit and linear model. Cols 1 and 2 provide evidence of a negative impact of bilateral trade on MID. Opposite effects of multilateral trade on bilateral MID, but only when the two countries are close. Col 3, in full sample, confirms the evidence and shows that the more distant the countries, the weaker the impact of bilateral trade and of multilateral trade To quantify the impact of trade on probability of MID, one needs to create a counterfactual. What would happen to probabilities of MID should the countries go back to the level of openness at the start of the current globalization phase? ➔ Predicted probabilities of war in 2000 and 1970 are averaged over four groups of countries. If we use 70s it seems that current globalization is a positive element for global wars war became more regional MMT conclude what follows: - the quantitative impact of trade on conflict probability is very large for proximate countries - bilateral trade flows have a negative impact on the probability of conflict and multilateral trade flows have a positive impact on this probability - the net quantitative effect of the globalization process in 1980-2010 was to increase the probability of a bilateral conflict by around 20% for proximate countries and by a negligible amount for distant countries ![](media/image22.png)These findings accord well with the observed shortening of the bilateral conflict over the same time span. MMT08 address various endogeneity issues (SS, RC and OV): - controlling for time-varying co-determinants of conflicts and trade - using lagged values of for bilateral and multilateral openness - including country-pair fixed effects (time-invariant factors) and time fixed effects (global factors) - implement an instrumental variable (IV) strategy MMT find two IVs that affect bilat. and multilat. trade, but not MID: the Generalized System of Preferences (GSP) and an index of economic remoteness of the two countries MMT find that endogeneity bias and measurement error are a source of concern for bilateral trade (less for multilateral trade). The main results carry through using the IVs They show that preferential trade agreements (PTAs) may have an indirect and direct impact on the emergence of interstate conflicts.The endogeneity of PTAs is, however, a particularly important issue and its impact not clear at all: PTAs can be signed either between political allies (with a negative estimated relation on conflict) or by potentially belligerent parties with an appeasement intent (with a positive estimated relation on conflict). **Hadjiyiannis et al. (2016 JIE)** elaborate a model with three competing importers. PTAs produce both a 'peace-creation' effect and a 'peace-diversion' effect, whereby they reduce the likelihood of conflict between member countries, but make the eruption of war between member and non-member countries more likely regional elements **Glick and Taylor 2008** On theoretical grounds, militarized conflicts may be accompanied by partial or total trade embargoes on goods exchanges, but they may reduce trade also by raising the transaction costs to private agents It makes a difference if conflicts are associated with changes in trade policy or not - the liberal hypothesis is mainly based on non-policy effects They examine some major indirect costs of war over the period 1870-1997 by looking at the effect of\ belligerent conflict on the volume of international trade and on per capita incomes and economic welfare. They consider direct effects and various externalities, as well as possible time lags. Moreover, as the liberal school requires, they compute the general equilibrium effects of war on trade and income ![](media/image24.png)War depresses trade between belligerents of about 80% to 90%. War creates negative externalities for neutral countries of about 5% to 12% on average\ (enlarged to 42% to 65% in major wars). Both of these effects decay slowly and persist for almost ten years Conflict has a huge impact on trade both for involved countries and neutral ones ![](media/image26.png) What happens if conflicts impact on growth, not just levels? 9/10/2024 **The zero-sum approach and economic nationalism** The logic of the liberal order sees **State intervention in economic affairs as exceptional**, that is motivated by specific circumstances and limited Creating a **level playing field** (an aspect of fairness in doing business) is necessary to prevent discrimination and to ensure that economic integration produces fair effects. Introducing 'behind the border' aspects into the new 'deep' trade agreements was an attempt at pushing liberalization a step further, limiting discrimination through domestic measures. This reveals a **tension between trade integration and state interventionism**, for decades solved with the so-called **winter of industrial policy and trade liberalization (very few industrial policies, fall of the state driven economy in Latin America)** The Single Market (SM) in the EU is a policy framework that way more than just tariffs, countries can not intervene in discriminating goods (not energy and defense): - it includes the abolition of all tariffs - it provides for the removal of non-tariff barriers - it requires technical standards and rules that are either 'homogeneous' or 'mutually recognized' by all nations - it entails that the factors of production (workers - capital - firms -ideas) can freely move in the area - it poses limits on national policies: 'country-neutral' effects - it requires common rules and management of competition policy - it requires common rules for those sectors where state intervention is motivated/necessary Is a joint responsibility from European countries to make the SM work properly - Example of the Article 101 of the TFEU prohibits horizontal and vertical (anti-competitive) agreements between companies which prevent, restrict or distort competition in the EU and which may affect trade between MSs. (there are ad hoc exemptions(notified agreements granted by the Commission when the benefits for the EU outweigh the costs) and "Block exemptions"), (Controversial cases (originated in a complaint, Commission own-initiative investigations, whistle-blowers, byproducts of leniency policy) are assessed on the basis of an "effects-based approach") - Example of the Article 102 prohibits firms that hold a dominant position on a given market to abuse that position (e.g., unfair prices, refusing to innovate, imposing predating conditions\ along the value chain, refusing to supply The Commission must assess whether the undertaking is dominant by first defining the **relevant market (it important to define how that market is important and somehow strategic)**: - Product market (in terms of product substitutes) - Geographic market (areas in which the conditions of competition are homogenous) As M&A may reduce competition and strengthen dominance, the Commission must be notified of any large plan. There is a **two-stage assessment procedure** Cases link. In case of approval subject to either **structural** (selling some parts of a company) or **behavioral** remedies, merging firms commit to remove the impediments in order to receive the authorization (they have to apply some remedies to be able to merge, adjusting their policy in order to do not create a dominant position). EU rules apply to all M&As independently from where the merging companies have their registered offices/headquarters in the world (it is important if they sell in the European market or not) : if the annual turnover of the combined businesses exceeds specified thresholds in terms of global and European sales, it is subject to review. Notice the inherent clash in any M&A (this lead to economic issues): - the reason why two firms choose to merge is to improve business processes and reduce costs by increasing scale, also thanks to a reduction in the number of competitors or in the degree of competition - competition authorities must prevent that lower degree of competition harms consumers' welfare (they have to renounce to lowering the price in order to maintain competition) Competition authorities protect consumers and competitors which would not be represented in the negotiations between merging companies - Example of the Art. 107 of the TFEU bans State aid measures that attribute an unfair advantage to some firms and create negative spillovers to firms of other MSs. Some measures are admitted (art 107.2 - de jure derogation, research and development) or tolerated (art 107.3 - discretionary derogation, some companies that provide jobs), upon notification to the Commission. Notably, sectoral, regional, social, environmental measures are valid under certain conditions that limit their distortive effects. **The EU have exclusive competence in this** EU competition policy has a clear **inward-looking orientation\ **because preventing discrimination after EU integration is fundamental to reduce the sources of conflict among EU MSs. One cannot have full market integration without common rules and common management of competition policy: it is therefore an **EU exclusive competence** carried out by the Commission, and not a shared competence run with the inter-governmental method.\ This **pro-fair-integration logic** has dominated since the second half of last century: things have started to change There are several reasons **why State aid measures can be justified** when they tackle market imperfections and address social concerns (those distortions need to be economically justified, efficient): - Protect disadvantage industries from risks (like agriculture in mountain) - Promote new strategic sectors (with either high sunk costs or high uncertainty or large externalities) - Promote innovation and knowledge (public goods) by internalizing knowledge externalities - Favor environment protection and social protection (came from immediate problems) - Address national security concerns (defense) The underlying idea is that the gains from State intervention need be contrasted with its costs, in particular when market segmentation is produced ![](media/image28.png)Different case if this happen with an external country financing an EU company inward action As we can see from the datas, now the bases of a liberal market are in crisis Western countries are investing more than ever, even more than developing countries, in measures to protect their economy Most of the investments are done in **domestic subsidies** less in FDI (foreign direct investments) **Screening process** by western (EU) governments a foreign company want to by a local one (to make sure is not problematic), control on foreign direct investment In the bar graph below it's easy to see the differences on instruments between western and other countries different between developing and developed countries ![](media/image30.png)**Different countries gave different importance on those maneuvers**. History of USA on invest to lower production costs, companies are allowed to became big, in the EU obsession for creating a level field (better to have competition than cheaper prices), China have many zombie companies (subsidized because important for social reason, arrive to overproduction and have to be subsidized to sell outside the country) The assessment of what measures are compatible with fair competition is fact-based ➔ a case-by-case exercise\ Different countries attach different weigh to the gains from intervention and the costs from distortions: - the US has typically favored innovation and lower industrial prices, favoring large companies - China has supported inefficient (zombie) firms that were deemed as important for employment, territorial and social reasons, subsidizing exports to sell the overproduction - the EU has favored a level playing field within the SM over innovation and cost reduction This inward-looking orientation of EU competition policy has been meant to reducing the sources of conflict among EU MSs and to preventing discrimination after market integration. that would have caused also political issues Yet, the recent surge of global behemoths in Asia/USA has challenged such inward-looking orientation (global disorder): - Should the EU stop before stifling the ability of large European firms to compete globally? - Should the EU support certain sectors of interest? - Should the EU tolerate MSs' activism in industrial policy? - Should the EU differentiate domestic vs foreign subsidies to EU firms? The tension that is apparent within the EU is in fact present also at the global level: yet, a global competition policy/authority is missing! There is not an international market order Among the reasons why **State interventions can be justified by the WTO** we mentioned: - Protect disadvantage industries from risks \... promote new strategic sectors \... promote innovation and knowledge \... - Address national security concerns This division is connected with the idea that national economic interests and national security interests are distinct (as discussed in the introduction to the course). However, **since the G7 meeting in Japan 2023**, the defense of national economic interests is considered as part of the national security strategy (mixing of national economic interest and economic competition, in that way there's no need of rules cause everyone may apply protective policies freely to help their economy). To what extent? This graph represent different motivation for new industrial policies in 2023. All of those motivations can somehow be considered national security mostly: GVC protection and Strategic Competitiveness This classification is based on this glossary: - **National security**: An official stated motive of the action refers explicitly to the current or future military security of the implementing country or specifically quotes 'national security'. - **Geopolitical concerns**: An official stated motive refers to countering the risk from a country or a class of countries (e.g., autocracies), even in the absence of a specific reference to national security. - **Resilience/security of supply** (non-food): An official stated motive of the action refers to improving the stability or security of local supplies of non-food products now or in the future. - **Domestic competitiveness** in strategic sectors: An official stated motive of the action refers to the promotion of domestic competitiveness or innovation in a strategic product or sector. - **Climate change mitigation** and other environmental objectives: An official stated motive of the action refers to the climate change mitigation or the transition to a low-carbon economy In sum, according to Evenett et al (2024):\ *"AEs have been more active in implementing new industrial policies and have done so primarily through the use of domestic and export subsidies. Trade restrictions on imports and exports have been more frequently used by EMDEs."\ "**Strategic competitiveness is the dominant motive** governments give for taking action, followed by climate change and supply chain resilience, with geopolitical and national security concerns accounting for a smaller share - that said, the combined trade coverage of the latter three sets of measures is equal to that of the most popular motive."* If the securitization of economics can explain the shift toward more assertive trade and industrial policies, what economic explanations may justify distortive policy interventions (i.e., altering industrial specialization and trade patterns)? Economic theory helps to set limits to interventionism, beyond which measures represent a threat to others' interests. Moreover, as noted by Evenett et al 2024, *'this raises several questions, such as whether the design of the announced measures can efficiently address their stated objectives, what alternative policies may exist, and how the world trading system should accommodate measures that on one hand address pressing national or global challenges, but on the other hand can have adverse impacts on others through spillover effects.*" Those measures are compatible with an open world? Those are some economic elements that can explain when measures can be acceptable 1. (Im)perfect competition and price elasticity: **Under perfect competition**, firms take the price in the market as given. **When competition is not perfect**, firms choose prices/quantities so as to maximize profits (there are few companies that can influence prices): each firm trades off higher (lower) price for lower (higher) sales. Ultimately, the price is determined by the **perceived elasticity of demand** and this latter is influenced, inter alia, by **market structure**. There is a connection between market structure and firms' behavior: - A *monopolist* exploits its market power to extract rents from the market that it controls entirely. - In an *oligopoly*, few large firms can use their collective market power (even without colluding) to determine higher prices and profits. - Under *monopolistic competition*, many small firms compete against each other over partially differentiated products (variety). They cannot collude, but they enjoy a residual\ monopoly power on their variety. - With *perfect competition*, companies have no market power. 2. Increasing returns to scale within the firm: When **increasing returns to scale** in production characterize a given industry, the larger is the size of a firm, the lower its average costs, the more competitive the company. - Larger markets attract firms in sectors with increasing returns to scale: costs of production are reduced by local concentration and this compensates for the costs of shipping goods abroad. - Transport costs increase with distance and limit such level of concentration 3. Externalities The liberal view is based on the idea that all countries benefit from specializing production in what they do relatively better and from trading. This may change when **externalities** are taken into account (the private cost is different from the public one). All economic behaviors affect units that are not directly involved in the transaction, and those generating effects on others have no incentives to consider them in making decisions ➔ the prices do not reflect them. This creates a difference between the private returns/costs and the social returns/costs. Public intervention is justified to the extent the authorities are capable to address these externalities. 2 kinds of externality: Static and Dynamics - Static (special, place related) The theoretical economic underpinnings of industrial policy in developing countries revolves around local externalities and market failures. - **(Marshallian or intra-industries) externalities** come from the geographical agglomeration of firms: pool of skilled labor, knowledge spillovers, proximity of specialized suppliers). Similar local spillovers can also be inter-industry, whereby the expansion of one sector provides benefits to another sector. - **Sector-specific coordination failures** and **information spillovers** for 'self-discovery' of newly profitable activities represent additional reasons. Static externalities do not jeopardize the win-win liberal interpretation of trade: governments can facilitate the achievement of the 'natural' specialization that externalities and market failures would hamper countries can facilitate the access of this externality (positive ones) but they are given and natural, have to do with the size - Dynamic externalities (have to do with action, the more you do the more you learn, network externalities, the first who arrives win) Different conclusions can be reached when dynamic externalities are present: - **Learning-by-doing effects and network externalities** provide long-lasting advantages to the market first comers and leaders (dynamic scale effects) - **Path dependence** in industrial innovation, especially at a time of structural transformations (dynamic growth externalities) 10/10/2024 - - ![](media/image32.png) - - - - - - - - - - - 4. Excessive interdependence: Trade integration has been so far assessed in terms of theamount of final production that is exchanged internationally. In fact, firms' activities depend both on upstream suppliers and on downstream customers, who can be either domestic or foreign. The restriction of access to suppliers may prevent the domestic production all together. The pandemic and the event to 'Ever Given' are clear, though accidental, examples of this issue. **The purposeful and coercive restriction of export/import can be used as a weapon**: this is at the core of weaponized interdependence ![](media/image36.png) Excessive interdependence can be problematic in many ways not only security relevance, problem of bottlenecks, natural shocks, case of food production (very interdependent production) 5. National security externalities: If national security depends on the very existence and autonomy of certain sectors or firms, state interventions may be necessary for non-economic reasons. Although these interventions can be detrimental for efficiency, the trade-off is between economic and non-economic values. Typically, this is subtracted from technical evaluations, and national security concerns trump over efficiency. Given its self-referential and non-economic nature, we shall not discuss this. **[Economic Interdependence ]** Globalization companies wanted to do business abroad, second unbundling Trade interdependence has grown due to the firms' attempt at supplying internationally. Technological, institutional and political developments fueled the globalization of production: fragmenting and distributing production across borders gives rise to a finer international division of labor and greater gains from specialization. Both multinational (MNC) and non-multinational companies organize production on a global scale by offshoring parts, components or services abroad. Typically, MNC choose to control the production process through the **ownership** of foreign plants, whereas internationalized non-MNC resort to either bilateral contracts or market-based transactions through intermediaries To protect both forms of internationalization (many elements), trade agreements have included investment-, IPR- and contracts-related provisions (the system of agreements was created to create a positive condition). The globalization of production is part and parcel of the economic integration process promoted under the liberal order. Firms benefit from outsourcing production abroad as they: - access better technology - exploit cost advantages and other local amenities (differences in regulation, state aid - access local resources - locate closer to the largest markets, and - (try to) reduce taxation. Firms often end up with few suppliers because they concentrate on those actors providing the largest advantages. This globalization of production is at the core of economic interdependence. While the liberal hypothesis is mainly based on countries willing not to give up the mutual benefits from reciprocally exchanging final products, actual economic interdependence considers the interconnections among the many phases of globalized production processes. ![](media/image38.png)Accordingly, if interested in assessing the security concerns associated with economic interdependence, one first needs to understand the features of global value chains and of the trade networks. According to Antras (2020),\ *"A global value chain (GVC) consists of a series of stages involved in producing a product or service that is sold to consumers, with each stage adding value, and with at least two stages being produced in different countries. A firm participates in a GVC if it produces at least one stage in a GVC."* The use of foreign value added in production is the key aspect, irrespective of what is trade (raw materials, intermediate inputs or tasks such as back-office services). Pure intermediation does not really contribute to the GVC (carry-along trade), but it is difficult to capture at the aggregate level the carry along element is not part of the GVC There are as many configurations of GVCs as the possible 'networks' of relationships: - 'spider-like' structures (multiple parts and one assembly place) - 'snake-like' structures (sequential series of stages) Using a product-based approach, the development of global production networks can be seen as the result of the segmentation of production into stages and of their allocation across the world. Using a firm-level approach, a company has to decide what stages of production to 'make\" and what to make at "home", and what to "buy" and what to "buy" from abroad. The implies a connection between the decisions on FDI and those on trade at the firm level. If MNCs are important players in GVCs, we expect a positive cross-country correlation between the stock of inward FDI and GVC participation. ![](media/image42.png)Direct relation between levels of foreign investments and participation in the GVCs. Production processes are associated with goods/services crossing borders multiple times in more than two countries. This poses serious measurement issues that are important to assess the extent of globalization, the features of trade network, the position of individual countries and their interdependence. The main problem is that we can observe trade flows, but not the movements of individual parts of a given production process. One way is to trace **value-added trade flows across countries** by\ combining information from customs offices and national input-output tables at the sectoral level to construct global sectoral input-output. Alternatively, one needs to focus on (billions of) **firm-specific transactions**, ideally domestic and international. If you want to control the technology is better to control the companies of your GVCs To really understand interconnections is better to control added value importance to control companies Those measures are important to understand interdependence how much of your export is foreign value added, is possible to observe both backward (dependence on imports) and forward (dependence to exports) GVC participation Global input-output tables are used to develop alternative measures of interdependence in the production processes. One can use **gross trade** flows. The simplest measure is the total imports in domestic production (I2P). Most indicators, instead, use the foreign value added (FVA) embodied in the gross flows (and remove the foreign value added in the imported intermediates) scaled by either domestic production (IVA2P) or domestic exports (IVA2E) -Baldwin and Freeman 2022 there are various databases One can use global I/O tables to develop some measures of **GVC participation and interdependence**.\ Assume that we use global I/O tables based on value added. One can consider the transactions in which a country's exports embody value added that it has previously imported from abroad: **backward GVC participation**. But one can consider transactions in which a country's exports are not fully absorbed in the importing country, but embodied in its own exports to third countries: **forward GVC participation**. The rate of backward participation is higher than that of forward participation. By construction, backward participation regards all the intermediate imports (also for goods consumed domestically), over export. From 1995 until GFC in 2008, hyperglobalization was apparent with forward and backward GVC participation increasing. From 2007 to 2009, average GVC production lengths shortened. The impacts of\ PRC-US trade tensions on GVCs can be seen as well in 2018-2019. ![](media/image44.png) Interdependence is related also to proximity not with high specialization(Taiwan) 16/10/2024 Countries do not only differ in the **extent** of participation, but also in the **sectoral composition** and in the **position** along the GVCs. controlling more relevant production you can control the GVC (also by owning companies companies can buy other firms, Italians are very integrated but we don't control them) Some countries specialize in agricultural or natural resources segments, others in manufacturing segments (low-tech or limited manufacturing, or high-tech or advanced manufacturing), others in services (including finance and knowledge). See next slide. ![](media/image46.png)As in the H-O model, factor endowments can shape the specialization and the positioning in GVCs (e.g., natural resource-rich countries feature high-levels of forward GVC participation; physical-capital-or skilled-labor-abundant countries have high levels of forward GVC\ participation and low levels of backward GVC participation). Some countries thus **'control'** a given GVC, others are potentially substitutable participants (Owing) Some countries are specialized in higher value adding productions specialization come from factors (important to play around it) With this 'broad conceptualization' of GVC, one can discuss a number of security-related concerns. Any restrictions of access to suppliers may impinge on the ability to produce, consume and defend (limited access to produce).\ Similar considerations regard the availability of technologies and knowledge, as well as the access to international financial networks (secrets and advantages). The focus of the analysis then can go on products, on supplying (acquiring) countries, or both. problem of being dependent from other countries NETWORK as a security concern: These general security concerns can (should) be reduced to a number of connected issues: 1. country's participation in GVCs ➔ ability to obtain income/welfare gains from it (competitiveness and control) 2. features of the trade network ➔ critical nodes & chock-points and bottlenecks (interdependence) 3. sectoral/country interconnections ➔ shock transmission (interdependence, food security) PRODUCTS as a security concern: If the entirety of the exchanges is important, for instance to assess the impact of blockades and embargos, one can look at broad aggregate trade data. Yet, one could **identify specific products**. This requires the definition of criteria, such as: 1. the importance of the products for consumption, domestic production,.. 2. the actual and potential diversification of the global suppliers 3. the security-related concerns of the main suppliers/buyers SECTORS as security issue: Alternatively, one can **identify 'vulnerable' sectors** on the basis of either on aggregate trade - I/O data or via a bottom-up process using firm-level data (see Borin et al 2023). - Studies based on aggregate trade and I/O information suffer of the limited disaggregation of data: production processes within the I/O tables are a representation of past average exchanges ➔ GVC trade networks - Bottom-up processes using firm-level data require to identify vulnerable firms over a range of imported inputs and to aggregate them: the identification of vulnerabilities depends on multiple criteria and thresholds. GVCs and trade networks The networks of trade and business relationships linking all countries is not random. Its **topology** (i.e., the arrangement of nodes and links) matters to understand both interdependence and resilience.\ Although trade networks depend on decisions made by firms, one typically looks at the aggregate patterns.\ Asymmetries and specific shapes of aggregate trade networks (e.g., hub & spokes) are the results of various factors: country-specific, pair-specific, regional and multilateral. Advances in technology, political arrangements and legal frameworks contribute to shape the evolution of trade networks. **Network topology** can be described in many ways: - The *density* of a network is the number of links, expressed as a proportion of the maximum possible number of links. - A *path* is the sequence of links connecting 2 nodes; the *geodesic distance* is the shortest path between them (next slide). longest the path is the less two countries are directly connected - ![](media/image48.png)The position of a node can be measured in terms of *centrality*: - The simplest measure of centrality is the number of neighbors (*degree centrality*), and it can be standardized by the maximum possible degree. Ex: 'friends' in a social network - A different notion is based on the idea that a node can be essential in the shortest paths between all pairs of nodes: number of shortest paths that pass through the node (*betweenness centrality*). Ex: power of the node as broker of information, ex Italy in 2011, Singapore, important because is the shorter connection for many countries to an important one - *Closeness centrality* of a node refers to the reciprocal of the sum of the length of all the shortest paths with all other nodes (if normalized, average length of the shortest path). Ex: closeness of a city in air transport network. - *Clustering* refers to the degree to which nodes tend to create tightly knit groups. Once the values for each node are calculated, it is possible to derive some statistics for the entire network. For instance, from the nodes' degree centralities one gets the average degree centralization and the distribution of the nodes' characteristics. One can see whether the way the nodes link/attach to others is determined by their similarity (i.e. assortativity, countries that are connected tend to create connections). For instance, in the world trade network, countries with many trade partners are on average connected with countries holding few partners (disassortative network). ![](media/image50.png)All these measures take different values when links are considered as undirected or directed, unweighted (degree) or weighted (strength, important, Russia case for EU). Besides static analyses, network studies tend to look at their evolution. This may be due to endogenous forces connected with network externalities and link formation mechanisms (e.gg, assortativity). Sometimes changes come from shocks: important cases in point have been, recently, the global financial crisis in 2008, the PRC-US trade war and the COVID-19 disruptions in 2020 Detecting nodes with 'similar' properties can help to identify relevant patterns. The process of grouping together nodes based on similarity is called *cluster analysis* (identifying groups data patterns, continental because trade is connected to proximity) The similarity measure used is typically based on topological criteria (degree, betweenness, distance from centroid,\...), but it can also be associated with other characteristics. A hierarchic clustering partitions the graph into a hierarchy of clusters. Antras 2020 introduces also a 'narrow conceptualization' (focused on companies they are the ones who drives trade) of GVCs that explores mainly the firm-level dimension of trade. Importing and exporting decisions by heterogeneous firms within the same industry are the determinants of the aggregate flows. The **selection** of the firms importing from/exporting to a given foreign market, together with their **ability** to generate operating profits, impacts on the distribution of value added and income. When the exchanges happen within a MNC (it controls the value chain), the allocation of the value added is also affected by pricing policies (in turn, influenced by tariffs, investment rules, taxation, \...). It emerges as crucial the role of firms leading a highly decentralized GVC. in economic security is being understand (now most of the sanction are about companies) This narrow characterization leads to different security-related concerns: 1. firms' leading/following position in GVCs 2. firms' control/protection of knowledge and technological transmission 3. firms' exposure to foreign coercion (sanctions, secondary sanctions, other restrictions) USA power over Iran 4. firms' exposure to strategic takeovers (inward FDI, aggressive buyers US used often against UE, Samsung buy patents) More in general, this helps to envisage the debated issue on the role of companies in foreign policy, intelligence and security, and the importance of the so-called geopolitics for corporations. As pointed out by Baldwin and Freeman (2022), the academic and policy debate have long gravitated toward the productivity and welfare- enhancing benefits of GVCs. The recent narrative in policy circles has moved toward highlighting the associated **risks**. Covid-19 and other shocks led to the realization that interdependence is conducive to risks, such as: import dependence on few nations and their policy decisions, the presence of choke points in international routes, the lack of strategic stockpiling, and the like. In particular, each of these issues cannot be fully considered and appreciated by individual firms: as externalities and coordination problem exist, public authorities should intervene. A country's resilience can be seen as a national public good. Draghi *\"Trade openness ensured that Europe could import freely goods and services it lacked, ranging from raw materials to advanced technologies, while exporting manufactured goods in which it specialised, particularly to the growing markets of Asia.* *However, the multilateral trading order is now in deep crisis \...* *Third, the era of geopolitical stability under US hegemony allowed the EU largely to separate economic policy from security considerations, as well as to use the 'peace dividend' from lower defence spending to support its domestic goals. The geopolitical environment is however now in flux owing to Russia's unwarranted aggression against Ukraine, deteriorating US-China relations and rising instability in Africa, which is a source of many commodities that are critical to the world economy."* As noted, GVCs can be affected by various kinds of external shocks. - **Supply shocks** include disruptions (natural disasters, cyberattacks, labor strikes, bankruptcy of suppliers, and industrial accidents) as well as policy-induced disruptions that alter the availability of intermediate inputs. - **Demand shocks** include damage to product and to company reputation, customer bankruptcy, entry of new competitors, policies restricting market access, macroeconomic crises, and exchange rate volatility. - **Transportation disruptions** are associated with the service-nature of the process World Economic Forum (2021, p. 4) is clear about the risks to GVCs: *'The increasing frequency of supply-driven disruptions - ranging from global pandemics and the climate crisis to cyber threats and geopolitical tensions - combined with an ever-intensifying set of demand-driven disruptions - including the rise of new consumer channels, pent-up demand and a fra

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