Week 8 Activities, seminars & core readings Flashcards
Global firms article: How does the Melitz model describe firm-level participation in trade?
The Melitz model assumes monopolistic competition, where firms decide to export based on their productivity, with only the most productive firms participating in international trade
Global firms article: What key evidence does the article provide about characteristics of exporting firms?
Exporting firms are typically larger, more productive, and more capital and skill intensive compared to non-exporting firms
Global firms article: What is the significance of extensive and intensive margins in global firm participation?
Extensive margins refer to the number of products and markets a firm engages with, while intensive margins refer to the volume of trade within those products and markets
Global firms article: What is the main conclusion about the role of global firms in driving aggregate economic outcomes?
Global firms significantly influence trade flows, pricing power, and market dynamics, magnifying small differences in productivity into large aggregate economic effects
All the key info from the US-China Decoupling core reading
Definition of decoupling:
Decoupling refers to the reduction of economic interdependence between the US and China, particularly in trade, technology, and investment flows
Key drives of decoupling:
1. Geopolitical Tensions: Rising strategic competition and national security concerns
2. Trade policies: US tariffs on Chinese goods and export restrictions on critical technologies
3. Technological rivalry: Controls on semiconductors and tech-related exports
4. Supply Chain resilience: US efforts to reduce reliance on Chinese manufacturing
Economic Realities vs. Rhetoric:
- Despite political rhetoric, trade volumes between the US and China remain substantial.
- Supply Chains: Many US firms continue to rely on China for manufacturing.
- Diversification vs. Replacement: Companies are diversifying supply chains (e.g., investing in Vietnam, India) but not fully abandoning China.
Sector-Specific Trends:
- Technology: Increased restrictions on critical tech exports (e.g., semiconductors).
- Manufacturing: Partial relocation of low-value manufacturing but persistence in high-tech dependencies.
- Finance: Limited decoupling; financial flows remain robust.
Winners and Losers from
Decoupling:
- Winners: Southeast Asian economies (e.g., Vietnam, Malaysia) benefiting from supply chain diversification.
- Losers: Firms with deeply embedded Chinese operations face high relocation costs.
Long-Term Outlook:
Complete decoupling is unlikely due to deep economic interdependence.
The future will likely feature selective decoupling in strategic sectors like semiconductors and AI
Key Takeaway:
US-China decoupling is more rhetorical than real, with significant selective decoupling in strategic industries but persistent economic interdependence across many sectors.
Key Information from the FT article on EU-China Economic Relations
Key Concepts and Ideas:
1️⃣ Economic Dependency:
- Trade Growth: Imports from China to the EU, including critical minerals and sensitive technology, have increased despite EU efforts to “de-risk” economic links.
- Trade Imbalance: The trade deficit remains a significant concern, with China being the largest supplier of goods to the EU.
2️⃣ Strategic Challenges:
- Critical Raw Materials: The EU relies heavily on China for rare earth minerals essential for green technologies.
- Technology Concerns: Increased EU caution over sensitive technology exports to China due to security risks.
3️⃣ De-risking vs. Decoupling:
- De-risking: Targeted reduction of dependencies on sensitive technologies and critical supply chains through diversification.
- Decoupling: A broader and more extreme reduction of economic ties, seen as economically unfeasible.
- Key Quote: “Decoupling is not feasible, short of war.”
4️⃣ Automotive Industry Dynamics:
- European carmakers benefited from US-China tariffs by increasing sales in China.
- Chinese Competition: Chinese electric vehicles are gaining market share in Europe.
5️⃣ Policy Responses:
- France: Tied EV subsidies to environmental standards, indirectly targeting Chinese manufacturers.
- Germany: Launched a “de-risking” strategy, urging companies to reduce dependency on China.
6️⃣ Future Outlook:
- Complete decoupling is unlikely; selective de-risking will continue in strategic sectors.
- The EU aims to reduce critical vulnerabilities without fully severing ties with China.
Key Takeaway:
The EU-China relationship reflects a balance between economic necessity and geopolitical caution, with a focus on targeted de-risking rather than full decoupling.
Key information from: Factories May be Leaving China, but trade ties are stronger than they seem
Key Concepts and Ideas:
1️⃣ Shifting Trade Patterns:
- US imports from China fell from 22% in 2017 to 17% in 2022.
- Vietnam and Mexico increased their share of US imports, supplying apparel, machinery, and electronics.
2️⃣ Indirect Dependency:
- Vietnam and Mexico import more inputs from China, suggesting indirect reliance persists.
- Many Chinese firms have relocated final assembly stages to countries like Vietnam and Mexico.
3️⃣ Cost Implications:
- Supply chain shifts increased prices:
+9.8% for imports from Vietnam.
+3.2% for imports from Mexico.
- Rising costs may contribute to higher consumer inflation.
4️⃣ Tariff Effects:
- US tariffs under Trump reduced direct imports from China but boosted indirect imports via third countries.
- Industries like electronics and chemicals relocated to countries integrated with Chinese supply chains.
5️⃣ Globalization vs. De-Globalization:
- Economists argue that global trade remains robust, but supply chains are being restructured, not dismantled.
- Rhetoric about de-globalization risks influencing policy and investment decisions.
6️⃣ Long-Term Questions:
- Can reshoring factories to the US outweigh the costs of higher consumer prices?
- Will innovation in domestic manufacturing justify these costs?
Key Takeaway:
US efforts to reduce dependence on China have reshaped supply chains but have not eliminated reliance. Instead, trade flows have been rerouted through third countries, increasing costs and maintaining deep interdependencies.
