O’Rourke on trade in the Financial Times

My position on supply chains is more nuanced than reported here, but that is I guess a standard thing for an academic to say when confronted with a newspaper article which of necessity has to compress arguments. I think supply chains can help explain an increased elasticity of trade w.r.t. output, but *only* if you make certain assumptions about what types of trade are hit at the margin when a downturn or upswing comes. (For all I know, these assumptions may be realistic.) That was the point of my Barbie and Ken post some months back.

Also, while the increased share of manufactures in world trade can help explain the increased volatility of trade now vis à vis the volatility experienced during the Great Depression (and I do think this effect is potentially quite important), I would concede that it is less useful in explaining increasing volatility over the past 2 or 3 decades, which is the focus of Freund and others.

Now, there is one very interesting possible debate that could be opened up by the FT article, in juxtaposition with this one (http://www.ifw-kiel.de/wirtschaftspolitik/politikberatung/kiel-policy-brief/kiel_policy_brief_9.pdf) (HT: Eurointelligence). Both the supply chain argument and the ‘increased share of manufactures’ argument seem to imply, as Alan Beattie says, that trade should rebound very sharply when the recovery comes. That was certainly the logical implication as I saw it, and I tend to side with Beattie. But the Kiel paper, co-authored by Holger Gorg, formerly of TCD, argues that the importance of sunk costs in setting up these supply chains may mean that if enough disruption happens to supply chains now (by suppliers being let go), they may not automatically reemerge after the crisis. Those of us who are old enough will recognise this as a variant of the ‘hysteresis and exchange rate’ arguments that were made during the 1980s in the context of the rise and fall of the dollar.

Which position is right is a strictly empirical matter.

This also seems like a good place to insert a reference to another fascinating debate which is happening right now about the Baltic Dry Index, which has been falling the last couple of months. See for example http://steelguru.com/news/index/2009/10/04/MTE0NTU2/Baltic_Dry_Index_market_nearing_the_2000_point_marks.html

Is this decline due to overcapacity in the shipping sector, or to a fall-off in demand? There are commentators arguing both positions right now.

(If there are any of my undergrads reading this, here is a question for you. If you observe price falling. and are trying to figure out whether this is due to an increase in supply or a decline in demand, what observable variable should be of help in figuring out what is going on?)

And the ubiquitous Prof. O’Rourke is also here:
http://www.guardian.co.uk/science/2009/oct/06/brain-food-year-economists-dread

coming over somewhat biblical.

Kevin

The Kiel Policy Brief on Global Production Networks by Godart, Gorg and Gorlich, which you refer to, apart from its pessimistic view of the future of these networks after the crisis, has some interesting inferences about the role of Ireland in these networks.

It highlights the role of ‘Irish’ companies both in vertical specialisation and outsourcing.

The shift to internationally traded services activity in the Irish economy in recent years suggests that Ireland’s role within global production networks is related to a coordination role in the servicing of EMEA and global markets on behalf of multinationals.

An important issue arising from this Kiel paper is how the crisis may affect such a role in the future.

It also raises questions about the problems of comparing trade patterns today with those in 1929: perhaps the increasing role of FDI in a globalising economy suggests the need to re-evaluate the traditional understanding of trade. Without the emergence of global production networks, how could a small country like Ireland have come to play such a significant intermediary role in international trade?