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For many of us, Chad Bown of the Peterson Institute for International Economics – a think tank specializing in, duh, international economics – has become the go-to for current trade policy developments. His work monitoring the development of Donald Trump’s trade war has been invaluable.
Now he has a very informative new paper with Thomas Bollyky on the vaccine supply chain. I’m not going to lie: there is a lot of detail and the paper is quite heavy. But it’s full of useful details, and it also tells us, I would say, some interesting things about the nature of global trade in the 21st century.
One thing that caught my eye – probably not the most important thing, but one that is close to my heart – is that the history of global vaccine production demonstrates the continued relevance of the so-called new trade theory, or, as some now call it, the “old new trade theory.”
Background: Here is an example of a graph from Bown and Bollyky, showing what is involved in the production of the Pfizer vaccine:
Producing these vaccines is obviously a complicated process, involving facilities in many locations, presumably involving many cross-border shipments of vaccine ingredients. Notably, in the case of Pfizer, all of these facilities are in the United States and Western Europe, which is typical for pharmaceutical companies, although other companies have a few facilities in Brazil and India.
So where do vaccine supply chains fit in international trade theory?
If you’ve ever taken an economics course, you’ve probably heard of the theory of comparative advantage, which states that countries trade to take advantage of their differences. The classic original example, by early 19th century economist David Ricardo, involved the exchange of English cloth for Portuguese wine.
Comparative advantage is a powerful and illuminating theory, not least because it shows why countries export the goods they relatively good at producing even if they are less productive in these industries than their potential competitors. Bangladesh is a low productivity country in all areas (although it has improved), but its productivity disadvantage is less pronounced in garments than in other industries, so it has become a major exporter of garments .
In the 1960s and 1970s, however, a number of economists began to suggest that comparative advantage was an incomplete story. Global trade had grown over time, but much of that growth involved trade between countries that didn’t look very different – the United States and Canada, for example, or countries in Western Europe. Moreover, what these countries were selling to each other was quite similar: there was a lot of “intra-industry” trade such as large-scale two-way trade in automobiles and related goods across the Canada-US border.
What was happening? Some economists had long noted that comparative advantage was not the only possible reason for international trade. Countries can also trade because the production of certain goods involves increasing returns – there are advantages to large-scale production, which provides an incentive to concentrate production in a few countries and export those goods to other countries. The auto trade between the United States and Canada is a classic example: after the countries entered into a free trade agreement for automobiles in 1965, North American automakers achieved economies of scale by limiting the range of items produced in Canada, exporting those goods, and importing other items from the United States.
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But if trade reflected increasing returns rather than national characteristics, which countries would end up producing which goods? It could be largely random, the result of accidents in history.
There was, however, remarkably little economic literature on trade with increasing returns until the late 1970s. Economists do not like to talk about things they find difficult to model, and trade models with increasing returns have tend to be complicated and confusing. Eventually, however, some economists found clever ways to clear up the confusion, in articles like this. 1980 coin in the American Economic Review:
(I will note, in all shamelessness, that the newspaper will later name this one among the 20 best items published in its first century of operation.)
God, I was young!
Either way, the story has a sense of humor. No sooner had economists come up with clever models of trade between similar countries, driven by economies of scale, than the world economy shifted away from this type of trade towards trade between dissimilar countries, driven by such as large wage differences.
World trade boomed from the mid-1980s until around 2008, a process sometimes referred to as hyperglobalization:
And where the growth of trade in the 1960s and 1970s largely involved advanced economies selling products to each other, hyper-globalization involved a surge in exports of manufactured goods from low-wage developing countries. relatively low:
So we had a new trade theory, but the new trade we were getting was much better explained by, well, the old trade theory.
So what does any of this have to do with vaccine supply chains? Well, as I’ve noted before, vaccine ingredients are mostly produced in advanced countries – countries that are very similar in their levels of education, overall level of technological proficiency and more. So why didn’t every advanced country produce all of the vaccine-related inputs? Here is what Bown and Bollyky say:
“The business model that much of the pharmaceutical industry had moved to over the previous 25 years involved fragmentation. As tariffs and other trade barriers fell globally, information and communications technology (ICT) developed, shipping and logistics efficiency increased and the protection of intellectual property rights has steadily improved. The fact that trade could play a greater role in the distribution of pharmaceuticals globally meant that companies could operate fewer factories, but on a larger scale..” [Emphasis mine.]
Hey, that’s the new trade theory in action! And it does seem that there have been a lot of random historical contingencies determining national roles in the pattern of specialization. Europe was initially very dependent on British lipid exports – but I doubt there is anything in British culture that makes the country particularly good with lipids. This is just one of those accidents that play a big role in economic geography.
Is there a moral to this story? There has been a lot of backlash against globalization over the past decade, with some justification: proponents of free trade agreements have overestimated their benefits and underestimated the disruptions they could cause. But the case of vaccine production illustrates a positive side of globalization that we tend to forget. These miracle vaccines are incredibly complex products that would have been difficult to develop and produce in a single country, even as large as the United States. A global market has provided all the specialized inputs that are saving thousands of lives as you read this.
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