2nd unbundling study guide Flashcards
Date the start and the trigger of the 2nd unbundling
- Revolution in ICT lowered the cost of moving ideas
- Cost went from very expensive to nearly costless in 20 years, which allowed continuous confirmed exchange of information
- “I” for information (computing and data storage costs)
- “C” for communication (transmission costs and reliability)
- “T” for technology (new working methods and workplace organisation)
Foreign direct investments (FDI)
Foreign direct investments (FDI): refer to investments made to acquire a lasting interest in enterprises operating outside of the investor’s own country. The purpose is to gain an effective voice in the management of the enterprise
Result: “Great convergence”
-G7 nations deindustrialized while a handful of developing nations industrialized
-Effects are concentrated geographically
Rapidly industrializing nations experienced steep growth take-offs
-Soaring income in the rapid industralizers set off a “commodity super-cycle”
-Rapid growth in developing nations and stagnate G7 growth produced the Great Convergence
-Nature of trade between G7 and many developing nations changed dramatically
-Almost all developing nations massively liberalized their policies on trade, investment, capital, services, and intellectual property.
“De-nationalized” comparative advantage
- 1st unbundling: exports are a “bundle” of national know-how, labour, capital, institutions (example: Ford has US labour, US capital etc..)
- 2nd unbundling: exports are a mixture of several national comparative advantages (example: Apple has US hi-tech software/design, Taiwanese management and Chinese Labour)
- Global value chains redraw international borders of comparative advantage -> Ricardo loses relevance
It’s about one country producing part of a good that will be mixed with another part in another country
Nature of trade changed
21st century trade is more -complex. 2nd unbundling trade reflects the intertwining of:
- -Trade in parts and components
- -International movement of production facilities, personnel, and know-how
- -Services necessary to coordinate the dispersed production (telecoms, internet, express delivery etc..)
- -Remark: this was already the case in the EU and in NA before 1990. What is new is the generalization of this complex trade to much larger “North and South” regions
- Now you look at different parts that go into production of a good
- Movement: Greenfield, brownfield etc…
- With 2nd unbundling, South started taking part in the process
Why are changes asymmetric between developed vs developing countries?
- Big change is factories crossing North-South Borders
- At start of 2nd unbundling, the knowledge-labour ratio was radically higher in the North than it was in the South (easier flows of ideas imply knowledge flooding from North to South, much less South to North)
- Ability to coordinate internationally was a revolutionary boost in developing nations abilities to export parts, but only mild stimulus for G7 part exporters
- The 2nd unbundling acted like an asymmetric trade opening (like northern “tariffs” on parts falling much more than Southern tariffs)
Change was way bigger for developing countries that had lower knowledge-labour ratio
Why the smile curve?
- Smile curve comes from dividing value added between pre-fabrication services (R&D), fabrication (manufacturing, assembly), and post-fabrication services
- “Servicification” of manufacturing
- Which part of production process is adding most value added has changed?
- With 2nd unbundling, value added of each sector changed
- After 1990: manufacturing process went down, hence, pre/post fab services went up
1st vs 2nd unbundlings: the differences
1st
- Initial trade pattern: blue arrows indicate the direction of trade (good 1 and 2 exported by north; good 3 exported by south)
- Freer trade increases exports of all 3 goods
- In north: H, M gain, L loses
- In South: H, M lose, L gains
- Since North has comparative advantage in High/Medium - in production of good 1 and 2
- Export good 1 and 2, but import good 3 since it has comparative advantage in low skilled workers
2nd
- North’s M-sector know-how goes to South
- As a result, Good 2 is now exported by South: comparative advantage has shifted from North to South
- Good 1 exported by North and Good 3 still exported by South
- -Which factor wins/loses?
- South know-how in M sector wins: M factor wins
- Bad for North M factor which loses
- Other winners and losers a bit less clear as transfer of know-how to South may affect them as well
Medium skilled workers in North suffer. Nothing changes for good 1 and 3
Why deeper provisions than pre-2nd unbundling?
Deep integration occurs because:
- As trade becomes more open, countries? Policies increasingly depend on each other (collective decision is better than unilateral decision-making)
- Deep integration agreements may be necessary to promote trade in certain sectors and economic integration more broadly. This applies to international production networks which require a governance structure beyond low tariffs.
