How Global Economic Integration Renders Trade Policy

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During the past few decades, a trulyglobal division of labor has emerged, pre-senting opportunities for specialization, col-laboration, and exchange on scales once un-imaginable. The confluence of falling tradeand investment barriers, revolutions in com-munications and transportation, the open-ing of China to the West, the collapse ofcommunism, and the disintegration of ColdWar political barriers has spawned a highlyintegrated global economy with vast poten-tial to produce greater wealth and higher liv-ing standards.The factory floor is no longer contained

within four walls and one roof. Instead, itspans the globe through a continuum ofproduction and supply chains, allowing leadfirms to optimize investment and outputdecisions by matching production, assem-bly, and other functions to the locations bestsuited for those activities. Because of foreigndirect investment, joint ventures, and otherequity-sharing arrangements, quite often“we” are “they” and “they” are “we.” And be-cause of the proliferation of disaggregated,

transnational production and supply chains,“we” and “they” often collaborate in thesame endeavor. In the 21st century, compe-tition is more likely to occur between enti-ties that defy national identification becausethey are truly international in their opera-tions, creating products and services fromvalue-added activities in multiple countries.There is competition between supply chains,but only after there is cooperation and col-laboration within supply chains. But trade and investment policy has not

kept pace with these remarkable changes incommercial reality. Our globally integratedeconomy requires policies that are welcomingof imports and foreign investment and thatminimize regulations or administrative fric-tions based on misconceptions about somevague or ill-defined “national interest.” Tonurture the promise of our highly integratedglobal economy, governments should committo policies that reduce frictions throughoutthe supply chain—from product conceptionto consumption—as well as in the flow of ser-vices, investment, and human capital.

Made on EarthHow Global Economic Integration

Renders Trade Policy Obsoleteby Daniel Ikenson

Daniel Ikenson is associate director of the Center for Trade Policy Studies at the CatoInstitute and coauthor of Antidumping Exposed: The Devilish Details of UnfairTrade Law (2003).

Executive Summary

December 2, 2009 No. 42

367978_TPA42_1stClass:367978_TPA42_1stClass 11/10/2009 9:09 AM Page 1

Introduction

As policymakers respond to the global reces-sion, they should remember that the unprece-dented global economic growth experienced inrecent decades owes much to the removal ofpolitical and economic barriers to trade andinvestment. During that time, a division of laboron a truly global scale has emerged, presentingopportunities for specialization, collaboration,and exchange that affirm—and might evenastonish—the great Adam Smith. Falling tradeand investment barriers, revolutions in commu-nications and transportation, the opening ofChina to the West, the collapse of communism,and the disintegration of Cold War political bar-riers have spawned a highly integrated globaleconomy with vast potential to produce greaterwealth and higher living standards.The dramatic reduction in transportation

and communication costs combined with wide-spread liberalization of trade, finance, and polit-ical barriers are all accomplices in what has beencalled “the death of distance.”1 Under the newparadigm, the factory floor is no longer con-tained within four walls and one roof. Instead,the factory floor spans the globe through a con-tinuum of production and supply chains, allow-ing lead firms to optimize investment and out-put decisions by matching production, assembly,and other functions to the locations best suitedfor those activities.These changes warrant a fresh approach to

trade policy. In the 21st century, it is inaccurateto characterize international trade as a competi-tion between “us” and “them.” Because of for-eign direct investment, joint ventures, and otherequity-sharing arrangements, quite often “we”are “they” and “they” are “we.” And as a result ofthe proliferation of disaggregated, transnationalproduction and supply chains, “we” and “they”often collaborate in the same endeavor. Underthe new paradigm, workers in developed andemerging countries are more likely to becoworkers than competitors.Today’s global economic competition is less

likely to feature “our” producers against “their”producers and more likely to feature entities

that defy national identification because theyare truly international in their operations, cre-ating products and services from value-addedactivities in multiple countries. There is com-petition between supply chains, but success firstdemands cooperation and collaboration withinsupply chains (i.e., cooperation and collabora-tion between some of “us” and some of “them”).This new commercial reality demands policiesthat are welcoming of imports and foreigninvestment, and that minimize regulations oradministrative frictions that are based on mis-conceptions about some vague or ill-defined“national interest.”The driving force behind innovation and

opportunity in this new era is the reduction andelimination of artificial barriers, both politicaland economic. As those barriers have dimin-ished, opportunities for new combinations oflabor, investment, and human capital haveemerged in defiance of what were once formida-ble obstacles to wealth creation.There have been signs in recent years that

policymakers are beginning to grasp the newreality. “Autonomous” or “unilateral” liberaliza-tion of trade barriers has accounted for most ofthe trade liberalization in developing countriesover the past two decades and, on average,applied tariff rates globally are well below theirmaximum allowable rates or “bound” ratesunder World Trade Organization agreements.However, the financial crisis and subsequentglobal recession have tested the depth of thatunderstanding and brought out the worst polit-ical instincts of some policymakers who thinkonly about short-term political benefits and dis-regard longer-term costs. In some cases, governments have raised trade

barriers, subsidized domestic champions, orimposed local lending or hiring requirements, allin the name of creating or protecting local jobsand supporting the local economy. Perhaps themost notorious protectionism during the currentglobal recession has taken the form of restric-tions on competition in government procure-ment markets. Apparently, policymakers aroundthe world still accept the pre-enlightened beliefthat proper stewardship of taxpayer resourcesand the optimal path to stimulating economies

2

In the 21st century,it is inaccurate to characterize

international tradeas a competition

between “us” and “them.”


require limiting fiscal spending to products andservices produced locally. It started with BuyAmerican provisions in the United States, andlike swine flu has jumped borders to Canada,China, the Philippines, and Australia. Require-ments to lend and hire locally have also beenimposed in some places. By indulging thesereflexive, populist, once-considered-vanquishedideas, politicians have made matters worse,while reinforcing antiquated assumptions abouthow the global economy actually works.Global economic integration has enabled

enterprises to flourish on scales unimaginablejust a generation ago. Not only should thereimposition of barriers under current econom-ic conditions be eschewed, but a firm commit-ment to bring trade and investment policy upto speed with 21st century commercial realitywould be a wise investment in the future. To nurture the promise of our highly inte-

grated global economy, governments shouldstop conflating the interests of certain produc-ers with the national interest and commit topolicies that reduce frictions throughout thesupply chain—from product conception toconsumption—as well as in the flow of ser-vices, investment, and human capital.

Stop Thinking “Us” vs. “Them”

The woes of two iconic American automak-ers, Chrysler and GM, and the U.S. govern-ment’s assumption of responsibility for theirrehabilitation occasioned a direct appeal fromPresident Obama to American economic “patri-otism.” He exclaimed, “If you are consideringbuying a car, I hope it will be an American car.”Ignoring, for the moment, the impropriety of theU.S. president attempting to influence commer-cial outcomes by endorsing particular products,even if one were inclined to buy an American car,the tricky question remains: What constitutes an“American” car? Economist Matthew Slaughter,in a recent Wall Street Journal op-ed, attempted toelucidate:

What exactly makes a car “American”?Does it mean a car made by a U.S.-

headquartered company? If so, then itis important to understand that anyfuture success of the Big Three willdepend a lot on their ability to make—and sell—cars outside the UnitedStates, not in it. A big reason Chryslerhas fallen bankrupt is its narrow U.S.focus. It has not boosted revenues bypenetrating fast-growing markets suchas China, India and Eastern Europe.Nor has it lowered costs by restructur-ing to access talent and productionbeyond North America.2

However, the angry reactions from Ameri-can labor unions, their patrons in Congress, andrabble-rousing television and radio personalitiesto GM’s proposal to reduce costs by shiftingmore production to Mexico and China suggestthat the above definition of an American car isnot universally embraced.3 For those whoobjected to GM’s plans, it is not the company’sbottom line that matters, but rather the compa-ny’s capacity to create U.S. jobs and stimulateU.S. economic activity. That GM might need tohave a viable plan to become profitable so as tocreate and support U.S. jobs and stimulate U.S.economic activity somehow doesn’t factor intothe equation for these detractors. Instead, inzero-sum fashion, they see investment in foreignoperations as antithetical to domestic job cre-ation and economic growth.4

Perhaps, then, they would find Slaughter’salternative definition of an American car moreacceptable:

Or is an “American” car one made with-in U.S. borders? If so, then it is impor-tant to understand that America todayhas a robust automobile industry thanksto insourcing. In 2006, foreign-head-quartered multinationals engaged inmaking and wholesaling motor vehiclesand parts employed 402,800 Ameri-cans—at an average annual compensa-tion of $63,538—20% above the na-tional average. Amid the Big Threestruggles of the past generation, in-sourcing companies like Toyota, Honda

3

Governmentsshould stop conflating theinterests of certainproducers with thenational interestand commit topolicies that reducefrictions through-out the supplychain.


and Mercedes have greatly expandedautomobile operations in the U.S. In fis-cal year 2008, Toyota assembled 1.66million motor vehicles in NorthAmerica with production in seven U.S.states supported by research and devel-opment in three more.5

But many Americans—including many ofthose who reject Slaughter’s first definition—have rejected this definition of an American caras well. Ironically, the people who are mostinclined to oppose outsourcing and define it as“shipping jobs overseas” tend to be the samepeople who criticize “insourcing” for shippingprofits or control of U.S.-based assets overseas.Even though the top-10-selling models of carsand trucks in the United States in 2008 wereall produced in the United States, by bothDetroit-based and foreign nameplate produc-ers, and even though foreign nameplate pro-ducers employ hundreds of thousands ofAmerican workers, pay local and nationaltaxes, support local economies, reinvest part oftheir earnings in their U.S. operations, andinvest in other local businesses, the fact thatcorporate headquarters are located in Tokyo orStuttgart or Seoul seems to hold sway. Yet, asput in another recent Wall Street Journal article:

Once you put down the flags and shutoff all the television ads with theirHeartland, apple-pie America imagery,the truth of the car business is that ittranscends national boundaries. A caror truck sold by a “Detroit” auto makersuch as GM, Ford or Chrysler could beless American—as defined by the gov-ernment’s standards for “domestic con-tent”—than a car sold by Toyota,Honda or Nissan—all of which havesubstantial assembly and componentsoperations in the U.S.6

At best, there is grudging acceptance of thepossibility that these insourcing companies arepart of the American manufacturing landscape.But it is impossible to imagine that the U.S. gov-ernment would have ever rescued Toyota or

Honda if they had presented with financial con-ditions as dire as Chrysler’s and GM’s.The automobile industry is one of many that

transcend national boundaries and is only oneexample of why international competition canno longer be described as a contest between“our” producers and “their” producers. The sameholds for most industries throughout the manu-facturing sector.Even the genetics of the U.S. steel industry,

which has been one of the manufacturing sec-tor’s most vocal proponents of trade barriers overthe years, are difficult to decipher nowadays.The largest U.S. producer of steel is the majori-ty Indian-owned company Arcelor-Mittal,which has corporate headquarters in Luxem-bourg and Hong Kong. The largest “German”producer, Thyssen-Krupp, is in the process ofcompleting a $3.7 billion green-field investmentin a carbon and stainless steel production facili-ty in Alabama, which will create an estimated2,700 permanent jobs there. And Americanicon U.S. Steel Corporation generates roughly25 percent of its total revenue selling steel pro-duced at its mills in Slovakia and Serbia.7

Despite the constant drone of voices be-moaning the imaginary decline of U.S. manu-facturing, the reality is that foreigners have beenquite bullish on the sector’s future. Between2004 and 2008, the stock of foreign directinvestment in U.S. manufacturing increased by48 percent to nearly $800 billion—a statisticthat should send “race-to-the-bottom” adher-ents into retirement.8 According to the Or-ganization for International Investment, therewere 875 new “Greenfield” projects underway orexpanding in 2008.9

Although foreign direct investment (FDI) inthe U.S. automotive and steel sectors, at $52 bil-lion and $17 billion, respectively, is significant, itis dwarfed by FDI in other sectors. The newHonda plant in Indiana and the Thyssen-Kruppfacility in Alabama make the headlines, but for-eign investment in U.S. chemical manufacturingat $218 billion is more than five times larger thanFDI in the automotive sector and nearly 14times the investment in steel production. Foreigninvestment in other U.S. manufacturing sec-tors—such as machinery, computers and elec-

4

The automobileindustry is one of many that

transcend nationalboundaries and is

only one example ofwhy international

competition can nolonger be described

as a contestbetween “our” producers and

“their” producers.


tronics, beverages, and cement and concrete—isalso more substantial than FDI in the U.S. auto-motive sector. In 2006, foreign majority-ownedcompanies employed more than 5 million peoplein the United States, and accounted for $195 bil-lion or 13 percent of U.S. exports and $482 bil-lion or 22 percent of U.S. imports of goods andservices.10

Meanwhile, statistics on U.S. direct invest-ment abroad further support the notion thatindustries transcend national borders. Between2004 and 2008, the total stock of direct U.S.investment abroad in all economic sectors in-creased 45 percent, from $2.2 trillion to $3.2trillion. The stock of direct U.S. investment inforeign manufacturing increased by 23 percentfrom $417 billion in 2004 to $512 billion in2008.11

The “us” versus “them” characterization ofthe global economy has never been quite right,but with today’s levels of cross-border invest-ment and economic collaboration, such think-ing is dangerously anachronistic.

The Proliferation ofGlobal Production and

Supply ChainsDell is a well-known American brand and

Nokia a popular Finnish brand, but neithermakes most of its components or assembles itsproducts in the United States or Finland,respectively. Some components of productsbearing the logos of these internationally recog-nized brands might be produced in the “homecountry.” But with much greater frequencynowadays, component production and assemblyoperations are performed in different locationsacross the global factory floor. Consider the Chinese-born computer com-

pany, Lenovo. Its executive headquarters arelocated in Beijing, Singapore, and NorthCarolina. It operates research centers in China,Japan, and the United States. And its produc-tion and assembly operations occur in China,India, Mexico, and Poland.To call Lenovo “Chinese” or Nokia “Finnish”

or Dell “American” misses the broader point that

these companies are truly global entities withfacilities, employees, and stakes in dozens ofcountries. Whereas a generation ago a productbearing the logo of an American or Japanese orGerman company may have been comprisedexclusively of domestic labor, materials, andoverhead, today that is much less likely to be thecase. Today, that product is more likely to reflectforeign value-added, regardless of location of thecompany’s headquarters or the country affiliatedmost closely with the brand. The distinctionbetween what is and what isn’t American orFinnish or Chinese has been blurred by foreigndirect investment, cross-ownership, equity tie-ins, and transnational supply chains. As SamuelPalmisano, IBM’s chief executive officer, put it,“State borders define less and less the bound-aries of corporate thinking or practice.”12

A 2008 World Trade Organization reportexplains the pattern this way:

Recent theories of fragmentation pre-dict that a reduction in trade costsleads to greater fragmentation of pro-duction, with firms geographicallyspreading the different stages of theirproduction process. When trade costsof intermediate inputs fall, differentstages of the production process cantake place in different places.13

Trade in intermediate goods related to“fragmentation of production” or “vertical spe-cialization” or “production sharing”—termsgiven to the inexorable expansion of the facto-ry floor across borders and oceans in responseto falling costs—has grown faster than trade infinal goods during the past two decades.14 Thesame is true for services.Economists generally rely on trade data,

input-output tables, and firm-level surveys tostudy trends in these multinational production-sharing operations. Though the literaturedescribes different measurement approaches—each with its own strengths and weaknesses—the consensus conclusion, regardless of measure-ment approach, is that the trend toward verticalspecialization continues to grow among coun-tries large and small and across the globe.

5

The distinctionbetween what isand what isn’tAmerican orFinnish or Chinesehas been blurred byforeign directinvestment, cross-ownership,equity tie-ins, and transnational supply chains.


The Organization for Economic Cooper-ation and Development maintains an input-output database to study the importance ofintra-industry linkages and inter-country de-pendencies in the production of manufacturedgoods. Out of 31 countries for which compar-isons could be made between the mid-1990sand 2000, 29 demonstrated an increased relianceon imported intermediate inputs (measured asthe ratio of imported intermediate inputs overtotal consumption of intermediate inputs).15

The median ratio increased from 17.9 percent to22.5 percent between the two periods.16

Under the metric just described, smallereconomies—which tend to produce a more nar-row range of products and rely more on import-ed materials and components—show a higherlevel of integration than larger economies, whichproduce a wider array of intermediate productsdomestically and find it easier to exploiteconomies of scale. Accordingly, the top fiveintegrated countries by this metric are all rela-tively small: Ireland (70.6%), Hungary (63.2%),Belgium (57.0%), Slovakia (54.4%), and Austria(52.7%).17 And the bottom five are large: Japan(7.2%), Brazil (10.5%), China (12.6%), India(12.7%), and the United States (17.8%).18

An alternative formulation, which considersthe use of imported inputs used in domesticproduction that is exported, may be a more use-ful measure of the degree of integration. A highvalue of imported inputs to total inputs suggeststhat a country is dependent on imports for pro-duction but does not give much indication aboutwhere the supply chain goes after that. A highvalue of imported inputs contained in exports,however, would suggest that producers in thatcountry rely on foreigners for inputs, whose out-put is, in turn, relied on by producers or con-sumers abroad.Under this alternative formulation (import-

ed inputs over domestically produced exports),the degree of vertical specialization is higherthan under the first formulation (importedinputs over total inputs). The median increasedfrom 26.3 percent in 1995 to 29.9 percent in2000.19 The top five integrated countries arestill relatively small countries under this metric,but some of the larger countries escape the

lowest five: the United States increased from12.3 percent in 1995 to 15.1 percent in 2000;China increased during the period from 16.6percent to 21.0 percent.20 One other highlightfrom this dataset is that the ratio of exports tooutput increased an average of 7.3 percentagepoints between 1995 and 2000, and more thanhalf of that increase (53.1%) was attributable tovertical specialization.21 In other words, thegrowth in trade during this period was mostlyof intermediate goods sold across borders butwithin production supply chains. David Hummels, who has been studying the

topic since the 1990s, estimates that vertical spe-cialization grew by as much as 40 percent in thelast quarter of the 20th century.22 He explainsthe reason for that growth this way:

Rather than concentrate production in asingle country, the modern multination-al firm uses production plants—operat-ed either as subsidiaries or through arm’slength relationships—in several coun-tries. By doing so, firms can exploitpowerful locational advantages, such asproximity to markets and access to rela-tively inexpensive labor.23

Perhaps the most compelling example ofHummels’ observation is the production processfor the Apple iPod. A popular device with whichconsumers around the world are familiar, theiPod—according to the inscription on the backof every model—is “Designed by Apple inCalifornia; Assembled in China.” The iPod pro-vides the quintessential model of transnationalproduction in the 21st century. The processbetween the design and final sale of an iPodinvolves collaboration and cooperation within aproduction supply chain that spans severalcountries, supporting jobs and economic activi-ty in each. A 2007 study published by the University of

California–Irvine sought to determine “whocaptures value in a global innovation system” bydisaggregating the components contained inan Apple iPod and determining the companiesand countries involved in manufacturing a unitin China. The authors found that the compo-

6

The processbetween the designand final sale of an

iPod involves collaboration and

cooperation withina production supply

chain that spansseveral countries,

supporting jobs andeconomic activity

in each.


nents were produced in the United States,Japan, Singapore, Taiwan, Korea, and China bycompanies headquartered in the United States,Japan, Taiwan, and Korea. The total cost ofproducing the iPod (components plus labor)was estimated to be about $144. Most of the profits on the constituent com-

ponents accrue to Japanese companies, who pro-duce the most important and most expensiveparts. Two U.S. components producers and afew from other countries capture small shares ofthe value. But the lion’s share of value accrues toApple since iPods retail for $299 and the cost ofproduction is $144 (at the time the study wasconducted). Some of the $155 per-unit mark-upgoes toward compensating U.S. distributors,retailers, and marketers, while the rest is distrib-uted to Apple shareholders or devoted to re-search and development, which supports engi-neering and design jobs higher up the valuechain.24

The capture of value in the iPod productionchain is fairly typical for western brands. JamesFallows characterizes this process of outsourcingas following the shape of a “Smiley Curve” thatis plotted on a chart where the production pro-cess from start to finish is measured along thehorizontal axis and the value of each stage of pro-duction is measured on the vertical axis. Aboutthis production process, Fallows concludes:

The significance is that China’s activityis in the middle stages—manufactur-ing, plus some component supply andengineering design—but America’s isat the two ends, and those are wherethe money is. The smiley curve, whichshows the profitability or value added ateach stage, starts high for branding andproduct concept, swoops down formanufacturing, and rises again in theretail and servicing stages. The simpleway to put this—that the real money isin brand name, plus retail—may soundobvious, but its implications are illumi-nating.25

Rather than appreciate how this comple-mentary process harnesses the benefits of our

globalized division of labor, some begrudgeiPods sales in the United States for adding to thebilateral trade deficit. But as the iPod studyauthors caution, “For every $300 iPod sold in theU.S., the politically volatile U.S. trade deficitwith China increased by about $150 (the facto-ry cost). Yet, the value added to the productthrough assembly in China is probably a fewdollars at most.” Should we really lament a tradedeficit in iPods or any other products assembledabroad, particularly when those products com-prise U.S. value-added and support high-payingU.S. jobs?One implication is that Chinese and Ameri-

can labor is complementary in this process.Without the division of labor, ideas hatched inAmerican laboratories by high-skilled, high-wage American engineers would be less likely tomaterialize into ubiquitous consumer productsbecause they would be too expensive to makeand sell for mass consumption. Without thedivision of labor, fewer ideas would go far beyondconception. As a consequence, higher payingjobs at both ends of the smiley curve would bemore difficult to support, as would the lowervalue-added manufacturing and assembly jobs inChina.The U.S. economy may reap the most ab-

solute value out of this arrangement, but fromChina’s perspective there are considerable bene-fits as well. U.S. technology and investment pro-vide jobs that would not exist in China if thisvertical specialization were not possible. Thearrangement also provides a conduit for technol-ogy transfer and skills acquisition that helpsraise Chinese productivity levels and standardsof living. China is in no way consigned indefi-nitely to performing low-wage, low-skill func-tions in the global supply chain. In fact, Chineseworkers have been moving up the skills andvalue chain to perform more sophisticated tasksin globally integrated production networks,yielding lower-skilled functions to workers inVietnam and other poorer countries.The dismantling of global barriers, both polit-

ical and economic, is a hallmark of the progressachieved in the second half of the 20th century.The economic growth it unleashed is indis-putable. Today, increasing numbers of people in a

7

Without the division of labor,ideas hatched in American laboratories would be less likelyto materialize into ubiquitous consumer productsbecause they wouldbe too expensive tomake and sell formass consumption.


diversity of countries depend on this openness.Their livelihoods demand access to importedmaterials, components, equipment, and foreigninvestment.

Coming to Terms withGlobal Economic RealityThe proliferation of transnational supply

chains renders trade statistics—import value,export value, the trade balance—rather mislead-ing, if not meaningless. What significanceshould be attached to the fact that the UnitedStates runs a trade deficit with China whenChinese value-added accounts for only about 50percent of the value of U.S. imports fromChina?26 The other half is value-added fromother countries. As concluded in a recentOECD study:

Exports of final goods are no longer anappropriate indicator of the (interna-tional) competitiveness of countries, asfollowing the emergence of globalvalue chains, final goods increasinglyinclude a large proportion of interme-diate goods that have been importedinto the country.27

The new interdependence and the globaldivision of labor are described in a recent reportfrom the U.S. Congressional Research Service:

Trade policy aimed at curbing importsfrom China, for example, would likelyaffect Chinese exporters and ancillarysectors, but it also may hit subsidiariesof U.S. companies and manufacturerswhose supply chains stretch there. It isnot surprising, therefore, that some ofthe strongest voices both for andagainst trade protectionism come fromAmerican-based manufacturers andservice providers.28

There are signs that U.S. policymakers arebeginning to grasp the concept that the oldassumptions are no longer valid. Recognition of

that interdependence probably helped ward off aproposed 27.5 percent tariff on all Chineseimports—the so-called Schumer-Graham bill—that had been under consideration in Con-gress for a several years. And just as policy intended to benefit one

constituency can inflict costs on others, some-times policy misses its target altogether or hasunintended beneficiaries. For example, betteraccess to the Brazilian market for U.S.-basedexporters benefits U.S.-headquartered compa-nies but also Stuttgart- or Tokyo-headquarteredcompanies producing and exporting from theUnited States. Thus, U.S. trade negotiators dothe bidding of companies that might not fitevery American’s definition of an Americancompany. Better access to the U.S. market ben-efits foreign-based producers as well as U.S. andforeign producers operating in the UnitedStates, who rely on access to imported rawmaterials, components, and capital equipment.Thus, foreign trade negotiators likewise do thebidding of American-based producers by facili-tating their access to cheaper inputs. In light of the proliferation of cross-border

investment and transnational supply chains, onwhose behalf are national trade policies craftedanyway? That is one of the central questionsposed in the aforementioned CRS study:

A large proportion of internationaltrade is conducted within productionnetworks and chains that cross inter-national borders. How does this affecttraditional trade and investment poli-cy that is based on national govern-ments, national economies, and coun-try-to-country relations?29

It is encouraging to see these questions raisedby a research group that informs U.S. congres-sional thinking. If the public and the U.S. presi-dent are confused about what constitutes adomestic automobile, then surely other policy-makers might be confused, too. They mightconsider reexamining their own prejudicesbefore reflexively supporting status quo policies. In many ways it is evident that policymakers

around the world already understand this. Why

8

In light of the proliferation ofcross-border

investment andtransnational

supply chains, onwhose behalf arenational trade policies crafted

anyway?


else would average applied tariff rates amongWorld Trade Organization members be so muchlower than their bound—or maximum allow-able—rates?30 How else could the last couple ofdecades have witnessed so much unilateral tradeliberalization—trade and other domestic eco-nomic reforms without reciprocity from othercountries? Australia, New Zealand, China, India,Mexico, Chile, and many other countries under-took significant reforms because the govern-ments reckoned it was in their interest to do so,regardless of what other countries did. Between1983 and 2003, developing countries slashedtheir tariffs by two-thirds (from 29.9 percent to9.3 percent on average) and unilateral reformsaccounted for fully two-thirds of those cuts.31

During the 10 years ending in 2006, nearlyevery country reduced its tariff barriers, and only3 out of 136 countries experienced an increase inoverall “trade restrictiveness.”32 Likewise, coun-tries both rich and poor have been rapidlyimplementing what are known as trade facilita-tion reforms—measures aimed at reforming andoverhauling the administrative and physical pro-cedures associated with the transport of goodsand services across borders.33

The Southeast Asian nations of Thailand,Laos, and Vietnam recently made good on a 10-year-old effort to better integrate their trans-portation systems. In the first phase of an agree-ment that officials hope will help create a “NewAsia Silk Road,” traffic rights have been extend-ed among the three countries that allow trucksto transit without having to unload cargo at bor-der crossings. The deal is expected to reduce thecost and time of cross-border trade, leading ulti-mately to more trade and the development ofnew industries throughout what is still hard-to-access portions of Indochina. Ultimately, theagreement is to include Burma and will establishthe only direct land route between the IndianOcean and the South China Sea.The fact that governments throughout the

developing world are seriously engaged in effortsto reform their customs procedures and upgradeor overhaul their physical trade infrastructure is arather firm endorsement of the proposition thatpolicymakers know that openness to trade—inboth directions—is an economic imperative.

The continued tariff slashing is testamentto the imperative of openness, too. In an effortto “reduce business operating costs, attract andretain foreign investment, raise business pro-ductivity, and provide consumers a greater vari-ety and better quality of goods and services atcompetitive prices,” the Mexican governmentinitiated a plan in January to unilaterally reducetariffs on 70 percent of the items on its tariffschedule. Those 8,000 items, comprising 20different industrial sectors, accounted for abouthalf of all Mexican import value in 2007.When the final phase of the plan is imple-mented on January 1, 2013, the average indus-trial tariff rate in Mexico will have fallen from10.4 percent to 4.3 percent.34

Mexico is not alone in the push to continue toliberalize trade. For reasons similar to Mexico’s,the Canadian government announced plans toscrap all remaining tariffs on imports of machin-ery and equipment to help reduce costs atCanadian factories.35 And since February, theBrazilian government has been suspending oreliminating tariffs on a variety of products in aneffort to reduce costs for Brazilian companiesrelying on imported inputs. Other countries havetaken similar actions, but the bulk of media at-tention has focused on policies reflecting humanfallibility and the instinct to overreact in crises.

Old Assumptions Die Hard

Despite the dramatic changes in commer-cial reality, governments often maintain tradeand economic policies that are stubbornlyincongruous with these facts of globalization.Policy still tends to reflect an old ideal of thenational economic interest. And that ideal—that standard—is still too often conflated withdomestic producer interests. Policymakers too often succumb to the

anachronistic, mercantilist view of trade as azero-sum contest between “our” producers and“their” producers. The belief that we are “win-ning at trade” when our producers sell more stuffthan their producers has never been correct butis particularly ill-informed given the evolutionof global business and trade patterns.

9

The belief that weare “winning attrade” when ourproducers sell morestuff than their producers has neverbeen correct but is particularly ill-informed giventhe evolution ofglobal business andtrade patterns.


Though domestic producer interests havenever been an adequate representation of thebroader national economic interest, they areeven less representative today, with transnation-al production and supply chains, foreign directinvestment, and the multitude of new economicrelationships that play such important roles ininternational trade. However, trade policy tendsto be ignorant of these changes and, in mostcountries, still maintains a bias toward domesticproducers. For evidence of that bias, one needsto look no further than the fact that govern-ments continue to engage in trade negotiationson behalf of producers, where the strategy is toconcede as little access to their own markets aspossible while gaining the most access possibleto other markets.As the interests of domestic producers are

often mistaken for the national interest, so is thenumber of jobs in the manufacturing sector mis-perceived as a barometer of the well-being ofproducers. But employment is a weak and mis-leading measure of the health of producers. It isthe value of output that matters to the producer.It is the value of output that determines the sizeof the economy. It is not how many workers aproducer employs that matters, but really howfew, or put differently, how productive each is. If10 workers are required to produce $1,000worth of output, then each worker (all thingsequal) accounts for an average $100 of outputand, assuming a simple example, an average$100 of income. But if, through improved tech-niques that increase labor productivity, fiveworkers can produce that same $1,000 worth ofoutput, not only do incomes rise to $200 forthose workers, but there are now five additionalworkers who are free to add value in some otherendeavor. It is the freed-up capacity of those fiveworkers—when applied elsewhere in the econo-my—that fuels economic growth. Mandating jobs through fiat is not a difficult

task. But creating value is the real goal. Whatmatters is performance—the ability to providevalue at a profit. Government policies thatundermine performance, which include policiesthat are concerned first with job creation, do nothelp economies grow. The most efficient way tobuild a dam involves the optimal mix of labor

and capital, maybe a few dozen workers and acouple dozen bulldozers. But if the objective isto “create jobs,” then a few hundred workerswith a few hundred shovels might be preferable.The point is that more jobs do not necessarilymean more economic growth, as inefficientapproaches detract from the national welfare bydiverting resources from areas that could pro-duce the most value to those where resourcescannot be deployed efficiently. And, inefficiencyundermines the ability of producers to competeinternationally.Mercantilist negotiating strategies or trade

barriers may temporarily benefit some producers,but they invariably hurt consumers, wholesalers,retailers, importers, truck drivers, warehouse op-erators, designers, engineers, accountants, mar-keters, financiers, and globally integrated pro-ducers who rely on imports and who have greatstakes in an open world economy. Policies thatbenefit one group very often harm another. Thepast few years are littered with such examples.U.S. antidumping duties on hot-rolled steel

from China have contributed to the fall in U.S.supply and a rise of U.S. prices, which (amongother effects) caused U.S. structural pipe pro-ducers to be less competitive internationallybecause hot-rolled steel is the primary materialinput for U.S. pipe production. Meanwhile, theU.S. restrictions caused the global supply of hot-rolled steel to increase and its price to decline,benefiting pipe producers operating in othercountries. Facing these competitive disadvan-tages, U.S. pipe producers themselves subse-quently petitioned for antidumping duties onimports from their competitors. As DavidPhelps, president of the American Institute forInternational Steel, describes it:

We see the pipe case as another exam-ple of trade protection against one prod-uct negatively affecting another. In thepipe case, the large number of hot rolledsheet cases, including against China,have severely limited US pipe produc-ers’ access to competitive internationallypriced raw materials. In the last year theprice differential between Chinese andUS hot rolled sheet approached $300

10

As the interests ofdomestic producersare often mistaken

for the nationalinterest, so is thenumber of jobs inthe manufacturingsector misperceivedas a barometer ofthe well-being of

producers.


per metric ton, putting US producers ata serious competitive disadvantage.AIIS does not believe that more protec-tionism solves the problems caused byprotectionism. In fact, we believe thatprotectionism for steel mill products hasand continues to threaten the healthand international competitiveness ofsteel consumers, who themselves areseeing increased competition fromChina and other countries who haveaccess to internationally competitivelypriced steel.36

Under the U.S. sugar program, producers ofcane and beet sugar are guaranteed by the gov-ernment a certain price for their commodity.Central to the scheme is a series of tariff ratequotas, which ensure that imports are insufficientto exert any significant downward pressure onprices. As a result of the program, sugar prices inthe United States have averaged around twicethe world market price for sugar over the lastdecade. And this “benefit” for a few uncompeti-tive producers in a few states has sent many com-panies in the food processing and confectionaryindustries to Mexico and Canada, where theyhave access—like their international competi-tors—to a crucial input at world market prices.In 2005, millions of women’s brassieres, lin-

gerie, and other garments from China sat inconfinement in European ports for weeks, pit-ting Europe’s retailers, shippers, and logisticsindustries against the continent’s textile indus-try. The so-called “bra wars” were the result ofthe EU government’s impositions of restrictionsagainst imported apparel on behalf of Europe’sless competitive producers—restrictions thatensnared millions of euros worth of clothingthat had already been paid for. The bra wars leftretail shelves sparse or empty for weeks and costretailers a considerable amount of business andconsumers fewer choices and higher prices. These problems are all products of trade

policies that consider the interests of domesticproducers to be tantamount to the nationalinterest. In a recent trade policy position paper,the U.S. National Retail Federation explainedthe dangers of conducting trade policy without

considering the interests of all links in the sup-ply chain:

Retailing is also an extremely tradereliant industry that is directly impact-ed by, and has a considerable stake inthe direction and operation of U.S.trade policy. Like other U.S. industries,including manufacturing and agricul-ture, every retailer, from the largestnational chains to the smallest neigh-borhood shop, depends on a globalsupply chain to procure the productsthat American consumers need andwant . . . when USTR and other tradeagencies have addressed textile andapparel issues, they have focused main-ly on accommodating the objectives ofU.S. textile manufacturers, while oftenignoring the equally important—if notmore significant in terms of jobimpacts—interests of other U.S. indus-try stakeholders, such as apparel manu-facturers, retailer, and importers.37

There is an economic interdependencebetween different interests in different coun-tries that has only been growing over the pastfew decades. Invariably, restrictions intended tobenefit one domestic constituency cause ad-verse effects elsewhere in the supply chain,often hurting other domestic constituencies.

Barrier Erosion,Not Imposition,

Begat Integration and GrowthThe second half of the 20th century, and

most profoundly the last fifth, is succinctly char-acterized as a period of barrier erosion. Reduc-tion in trade and investment barriers beginningright after World War II, followed by expansionof those more liberal trading rules to other coun-tries, followed by China’s opening to the West,the collapse of the Berlin wall (and, with it, anyremaining credibility to communism), and thesubsequent outward reorientation of India andother developing countries amounted to an

11

Restrictionsintended to benefitone domestic constituency causeadverse effects elsewhere in thesupply chain, often hurting other domestic constituencies.


unprecedented enlargement of the world. Andthat enlargement was made more apparent byrevolutionary changes in communications andtransportation. Larger markets meant more cus-tomers and greater opportunities for economiesof scale. Having more potential customers overwhom to spread start-up and then operatingcosts opened up greater possibilities. And con-sideration of those potential customers as poten-tial employees or collaborators unleashed mas-sive changes in how and where production andother value-added activities take place.The elimination of barriers (physical, tech-

nological, political, administrative, and psycho-logical) has expanded the pie and deliveredtremendous wealth and opportunity over thepast several decades, lifting hundreds of millionsof people out of abject poverty, while reinforcingthe preference for cooperation over conflict. Ithas been a story about the virtues of barrier ero-sion and integration. Yet, a popular, almostreflexive response among policymakers to theglobal recession is to embrace barriers and seg-mentation. But policies that are good for theeconomy under normal circumstances—policiesthat paved the way for unprecedented econom-ic growth—must not be eschewed during tougheconomic times.Unfortunately, a sort of tribal instinct has

played a large role in shaping policy responses tothe global recession. One of the more prevalentforms of trade tribalism on display has been pro-tectionism in government procurement markets.Tempted by the ghost of Keynes, many govern-ments embarked on wildly extravagant fiscalexpansions in efforts to “stimulate” their econ-omies and “put people back to work.” But, insome countries, supposedly to prevent “leakage”of taxpayer funds outside of the domestic econ-omy, legislators imposed buy-local, hire-local,and lend-local rules on the disposition of thefunds.Only a rudimentary understanding of supply

and demand is required to see that limiting gov-ernment procurement to fewer bidders onlyensures that taxpayers get less bang for theirbuck. If there is less competition for every pro-curement dollar, projects will cost more and suf-fer from delays and lower quality. Meanwhile,

there will be fewer resources to devote more effi-ciently elsewhere in the economy. If companiesthat receive funding from the government areprecluded from hiring foreign workers—asrecipients of TARP money in the United Statesare restricted from doing—then they are morelikely to spend too much on labor and less like-ly to attain the services of the most qualifiedcandidates. If the government limits certainfinancial institutions to making loans domesti-cally, as is the case in the United Kingdom, thenthey will be less capable of spreading risk pru-dently and accessing potentially lucrative foreignmarkets, threatening their very viability.In a “chickens coming home to roost” exam-

ple of the absurdity of imposing buy-local rulesin a globalized economy, consider the following.In the United States, foreign and domesticvalue-added is so entangled in so many differentproducts that even the Buy American provisionsin the recently enacted American Recovery andReinvestment Act of 2009, struggle to define anAmerican product without conceding the inani-ty of the objective.

The Buy American Act restricts thepurchase of supplies that are notdomestic end products. For manufac-tured end products, the Buy AmericanAct uses a two-part test to define adomestic end product.(1) The article must be manufacturedin the United States; and (2) The cost of domestic componentsmust exceed 50 percent of the cost ofall the components.38

The definition itself makes allowance for thefact that a purebred American product is often amutt. Most of the carbon steel shipped from U.S.rolling mill operations—as finished hot-rolled orcold-rolled steel—is first produced in slab formin places such as Brazil and Russia, and as such isironically disqualified from use in U.S. govern-ment procurement projects for failure to meetthe statutory definition of American-made steel.Duferco Farrell, a Pennsylvania company thatrolls imported steel slabs into hot-rolled coils forconsumption by downstream producers, lost its

12

Only a rudimentaryunderstanding of

supply and demandis required to

see that limitinggovernment

procurement tofewer bidders only

ensures that taxpayers get less

bang for their buck.


most important customer, Wheatland Tube, asteel pipe and tube supplier located just next doorto Duferco’s plant, because Duferco’s supplychain includes a foreign producer of steel slab.39

It is tough to muster much sympathy forthese particular victims, given the steel indus-try’s longstanding role in the trade restrictionsracket. But in this case, as in all other cases ofprotectionism, unwitting groups are beingforced to subsidize the existence of businessesagainst their will.The removal of barriers and the subsequent

integration of markets were catalysts for theunprecedented global economic expansion of thepast several decades. According to what logic,then, do new barriers and segmentation repre-sent the road to recovery?

Optimal Government Policies

The global economy can no longer be char-acterized as a competition between “us” and“them.” Dramatic increases in cross-borderinvestment and the proliferation of transnation-al production and supply chains have blurredany meaningful distinctions between our pro-ducers and their producers. Very often, they arewe and we are they, working collaborativelytoward the same objectives. What does this say about the propriety of

current trade policies, which are predicated onmaximizing benefits for domestic producers? Itaffirms that policy reform is in order.Trade policies predicated on the conflation of

producer interests and “the national interest”produce frictions throughout supply chains—from product conception to consumption.Policies that do not try to channel incentives forthe benefit of specific groups or specific objec-tives but instead provide the greatest opportuni-ties for citizens to partake of the opportunitiesafforded by our increasingly integrated globaleconomy are the ones that will maximize eco-nomic growth and national welfare.Producers operating in the United States,

whether they are domestic, foreign, or somecombination of the two, compete with otherproducers for U.S. and foreign market share. So

do their upstream suppliers and downstreamcustomers. In this competition, policy shouldbe neutral.The CRS report cited earlier suggests that

the old mercantilist approach will no longer do:

A crucial issue for U.S. policymakers ishow to create conditions that makethe U.S. economy more attractive as alocation for both U.S. parented supplychains and for segments of supplychains of foreign companies.40

Rather than predetermine winners andlosers, trade policy should aim exclusively toattract human capital and financial investmentto the highest value-added activities possible. Ofcourse that implies a considerably diminishedrole for trade policy, which should be focusedexclusively on ensuring openness and pre-dictability with respect to import rules and cus-toms procedures. The rest depends on transpar-ent financial regulations, liberal immigrationpolicies, limited frictions in labor, financial, andgoods markets, and respect for and adherence tothe rule of law.Although trade’s critics speak of a “race to

the bottom,” where governments compete forinvestment by lowering the standards—a con-cern unsupported by trade and investmentflows—it is really more appropriate to speak ofa race to the top. Governments are competingfor investment and talent, which both tend toflow to jurisdictions where the rule of law isclear and abided; where there is greater certain-ty to the business and political climate; wherethe specter of asset expropriation is negligible;where physical and administrative infrastruc-ture is in good shape; where the local workforce is productive; where there are limitedphysical, political, and administrative frictions;and so on. Thus, there is a race to the top, asgovernments compete to secure for their peo-ple the highest value-added rungs possible onthe global supply chain.Over the past couple of centuries, economists

have spoken of comparative advantage in thecontext of industries. In David Ricardo’s telling,Portugal had a comparative advantage in wine-

13

Rather than predetermine winners and losers,trade policy shouldaim exclusively to attract human capital and financial investment to thehighest value-added activitiespossible.


making and England had a comparative advan-tage in cloth-making. So each country wouldfocus its productive efforts where they weremost efficient, and exchange surpluses, to attainthe highest level of output and consumption.Today comparative advantage can apply to

functions in the supply chain. China may have acomparative advantage in electronic assemblyoperations vis-à-vis the United States today, theUnited States may have a comparative advantagein product design vis-à-vis Japan, and Japan mayhave a comparative advantage in componentproduction. Instead of trading wine for cloth, themodern set-up implies a collaboration betweenU.S. engineers, Japanese manufacturers, andChinese assemblers—that is, collaboration in theproduction of Apple iPods and similar products.But as a country’s skill sets change—partly as afunction of its policies—the people will becomerelatively more efficient in some endeavors andrelatively less efficient in others.That countries are not destined to remain in

their current supply chain rungs, but canascend or descend the value-chain, as the casemay be, should be motivation enough for gov-ernments, both rich and poor, and at all stagesof development, to adopt the policies that aremost likely to provide the greatest and highestvalued-added opportunities for their people.

Conclusion

International trade today is no longer a com-petition between our producers and their pro-ducers. It is more appropriately characterized asa competition between entities that increasinglydefy national identification. Dramatic increasesin cross-border investment and the proliferationof transnational production and supply chainshave blurred any meaningful distinctions be-tween our producers and their producers. Veryoften, they are we and we are they, working col-laboratively toward the same objectives.Understanding this new reality and the

process that spawned it must become secondnature to policymakers and the public if we areto vanquish, once and for all, the outdated,zero-sum-game characterization upon which

rests the argument for protection and insulari-ty. Trade policies predicated on antiquatedassumptions—policies designed to serve pri-marily the aims of certain domestic producerswhose interests are too often conflated with thenational interest—should yield to policies thatreduce frictions throughout supply chains—from product conception to consumption. Today, the factory floor crosses borders and

spans oceans, from the idea mills in SiliconValley to the components producers in Singaporeto the assembly operations in Shenzhen to thedistribution centers in St. Louis to the shoppersin suburbia. Under this arrangement, trade barri-ers are akin to malfunctioning equipment on theassembly line. They raise costs and reduce effi-ciency in a way that hurts everyone touched bythe production and supply chains, including,most profoundly, people in the country imposingbarriers.Despite these lessons, the global recession

has caused some governments to indulge inretrograde policies and others to be tempted bythem. Policymakers have implemented or flirt-ed with ideas that presume the world is stillcharacterized as “us” versus “them.” Their ideaswould reintroduce barriers and discount therole that the integration of markets—that sup-ply chains, foreign direct investment, and thecollaborations across political boundaries andacross skill sets—has played in drasticallyreducing poverty in poorer countries, creatinggrowth, generating wealth, and boosting livingstandards across the globe. History reveals thatour economic growth is a product of enlargingthe pie, but policymakers are still tempted tocarve it up.Policies that do not try to channel incentives

for the benefit of specific groups but rather pro-vide the greatest opportunities for citizens to par-ticipate most effectively in our increasingly inte-grated global economy are the ones that willmaximize economic growth and national wel-fare. People in other countries should be thoughtof more as customers, suppliers, and potentialcollaborators instead of competitive threats.Policies that attract investment and human cap-ital—rather than seek to advance the interests ofimport-competing industries exclusively—are

14

Today, the factoryfloor crosses

borders and spansoceans, from the

idea mills in Silicon Valley to the components

producers inSingapore to the

assembly operationsin Shenzhen to thedistribution centersin St. Louis to the

shoppers in suburbia.


more likely to enable collaboration with comple-mentary work forces through integrated supplychains or foreign direct investment.

Global economic integration has enabledenterprises to flourish on scales unimaginablejust a generation ago. Not only should the re-imposition of barriers under current economicconditions be eschewed, but a firm commitmentto bring trade and investment policy up to speedwith 21st century commercial reality would be awise investment in the future.

Notes1. The Death of Distance: How the CommunicationsRevolution is Changing Our Lives is the title of a 1997book written by Frances Cairncross about the im-pact of the revolutions in communication andtransportation on globalization.

2. Matthew J. Slaughter, “What Is an ‘American’Car?” Wall Street Journal, May 7, 2009.

3. Under pressure from the United AutoworkersUnion and the Obama administration (which con-trols GM’s board of directors), GM abandonedplans to import small cars to give scope to manu-facturing facilities in the United States. For details,see Henry Payne, “Will Small Be Beautiful forGM?” Wall Street Journal, July 18, 2009, http://online.wsj.com/article/SB124786970963060453.html.

4. For the record, the empirical evidence supportsa positive relationship between the growth of acompany’s foreign operations and the growth of itsdomestic operations. Following is an excerpt fromDaniel T. Griswold, Mad about Trade (Washington:Cato Institute, 2009), p. 100: “Investing abroad isnot about ‘shipping jobs overseas.’ There is no evi-dence that expanding employment at U.S.-ownedaffiliates comes at the expense of overall employ-ment by parent companies back home in theUnited States. In fact, the evidence and experienceof U.S. multinational companies points in theopposite direction: Foreign and domestic opera-tions tend to compliment each other and expandtogether. A successful company operating in afavorable business climate will tend to expandemployment at both its domestic and overseasoperations. More activity and sales abroad usuallyrequire more managers, accountants, lawyers, engi-neers, and production workers at the parent com-pany.”

5. Slaughter.

6. Joseph B. White, “What Is an American Car?”Wall Street Journal, January 26, 2009.

7. United States Steel Corporation, 2008 AnnualReport, p. 8, http://www.uss.com/corp/proxy/documents/2008_annual_report-v2.pdf.

8. Bureau of Economic Analysis, Foreign DirectInvestment in the United States, http://www.bea.gov/international/xls/LongIndustry.xls.

9. Organization for International Investment, “De-spite Economy, 2008 Sets Record for ForeignInvestment,” press release, March 18, 2009. Green-field projects include construction of new factories,warehouses, buildings, or facilities from scratch onpreviously undeveloped land.

10. Thomas Anderson, “U.S. Affiliates of ForeignCompanies, Operations in 2006,” Survey of CurrentBusiness, August 2008, p. 186.

11. Bureau of Economic Analysis.

12. Samuel J. Palmisano, “The Globally IntegratedEnterprise,” Foreign Affairs 85, no. 3 (May/June2006): 129.

13. World Trade Organization, World Trade Report2008, p. xviii.

14. Ibid., p. 102.

15. Norihiku Yamano and Nadim Ahmad, TheOECD Input-Output Database: 2006 Edition, STIWorking Paper 2006/08, http://www.oecd.org/dataoecd/46/54/37585924.pdf.

16. Author’s calculation based on data in Yamanoand Ahmad, Annex 1.

17. World Trade Organization, p. 103.

18. Yamano and Ahmad.

19. Author’s calculations based on Table 12,World Trade Organization, p. 104.

20. Ibid.

21. Ibid.

22. David Hummels, Dana Rapoport, and Kei-MuYi, “Vertical Specialization and the ChangingNature of World Trade,” FRBNY Economic PolicyReview, June 1998.

23. David Hummels, Jun Ishii, and Kei-Mu Yi, “TheNature and Growth of Vertical Specialization inWorld Trade,” Federal Reserve Bank of New York,Staff Report, March 1999.

24. Greg Linden, Kenneth L. Kraemer, and JasonDietrick, “Who Captures Value in the Global In-novation System? The Case of Apple’s iPod,”Personal Computing Industry Center, Universityof California, Irvine, June 2007.

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25. James Fallows, “China Makes, the WorldTakes,” theAtlantic, July/August 2007, http://www.theatlantic.com/doc/200707/shenzhen.

26. Robert Koopman, Zhi Wang, and Shang-jinWei, “How Much of Chinese Exports Is ReallyMade in China? Assessing Foreign and DomesticValue-Added in Gross Exports,” U.S. InternationalTrade Commission, Office of Economics, WorkingPaper no. 2008-03-B, March 2008. The authors’methodology for determining the Chinese contentof Chinese exports yields a much higher figurethan Hummels because they set out the capturethe effect of “export processing,” where imports aremade exclusively for production for export, whichwas ignored by Hummels, but constitutes a largeportion of Chinese trade.

27. See http://www.oecd.org/dataoecd/41/18/39936529.pdf, p. 6.

28. Dick K. Nanto, “Globalized Supply Chains andU.S. Policy,” CRS Report for Congress, Congres-sional Research Service, January 16, 2009, p. 8.

29. Ibid, p. 2.

30. See World Trade Organization, World TariffProfiles 2008 (Geneva, 2009). For example, India’saverage bound rate is 50.2%, but its averageapplied rate is 14.5%; Ghana’s average bound rateis 92.5%, but its average applied rate is 13.0%.

31. World Bank, “Global Economic Prospects:Trade, Regionalism, and Development,” 2005,p. 42.

32. World Trade Indicators 2007: Global Trade Policiesand Outcomes (Washington: IBRD/World Bank,2007), p. 3.

33. For a detailed analysis of trade facilitation, seeDaniel Ikenson, “While Doha Sleeps: Securing Eco-nomic Growth through Trade Facilitation,” CatoInstitute Trade Policy Analysis no. 37, June 17,2008.

34. Government of Mexico, Economic Secretary,“Mexico Launches a Phase Down Plan to ReduceImport Rates,” NAFTA Works (A Monthly Newsletterof NAFTA and Related Issues), http://www.naftamexico.net/naftaworks/nw2009/Jan09.pdf.

35. James Pethokoukis, “Canada to Scrap Tariffs toHelp Factories,” Reuters, http://www.reuters.com/article/marketsNews/idUSTST0000220090917.

36. “More Trade Protection for Steel ThreatensConsumers,” American Institute for Internation-al Steel, July 7, 2007, http://www.aiis.org/index.php?tg=articles&idx=Articles&topics=19.

37. Erik O. Autor, Vice President, InternationalTrade Counsel, National Retail Federation (Letterto U.S. President Barak Obama, March 26, 2009).

38. Federal Acquisition Regulations, Subpart 25.1—Buy American Act—Supplies, Provison 25.101(a),http://www.acquisition.gov/far/current/html/Subpart%2025_1.html.

39. The Buy American provision requires that allsteel used in procurement projects be made andmelted in the United States, and neither Brazilnor Russia is exempted from those restrictionsunder international treaty. See http://www.sharon-herald.com/local/local_story_135222256.html for more detail.

40. Nanto, p. 2.

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Trade Policy Analysis Papers from the Cato Institute

“A Harsh Climate for Trade: How Climate Change Proposals Threaten Global Commerce” by Sallie James (no. 41;September 9, 2009)

“Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform” by Peter B. Dixon and Maureen T.Rimmer (no. 40; August 13, 2009)

“Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade Consensus” by Daniel Ikenson and ScottLincicome (no. 39; April 28, 2009)

“A Service to the Economy: Removing Barriers to ‘Invisible Trade’” by Sallie James (no. 38; February 4, 2009)

“While Doha Sleeps: Securing Economic Growth through Trade Facilitation” by Daniel Ikenson (no. 37; June 17, 2008)

“Trading Up: How Expanding Trade Has Delivered Better Jobs and Higher Living Standards for American Workers” byDaniel Griswold (no. 36; October 25, 2007)

“Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade” by Daniel Ikenson (no. 35; August 28,2007)

“Freeing the Farm: A Farm Bill for All Americans” by Sallie James and Daniel Griswold (no. 34; April 16, 2007)

“Leading the Way: How U.S. Trade Policy Can Overcome Doha’s Failings” by Daniel Ikenson (no. 33; June 19, 2006)

“Boxed In: Conflicts between U.S. Farm Policies and WTO Obligations” by Daniel A. Sumner (no. 32; December 5, 2005)

“Abuse of Discretion: Time to Fix the Administration of the U.S. Antidumping Law” by Daniel Ikenson (no. 31; October 6,2005)

“Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers” by Daniel Griswold, StephenSlivinski, and Christopher Preble (no. 30; September 14, 2005)

“Backfire at the Border: Why Enforcement without Legalization Cannot Stop Illegal Immigration” by Douglas S. Massey(no. 29; June 13, 2005)

“Free Trade, Free Markets: Rating the 108th Congress” by Daniel Griswold (no. 28; March 16, 2005)

“Protection without Protectionism: Reconciling Trade and Homeland Security” by Aaron Lukas (no. 27; April 8, 2004)

“Trading Tyranny for Freedom: How Open Markets Till the Soil for Democracy” by Daniel T. Griswold (no. 26; January 6,2004)

“Threadbare Excuses: The Textile Industry’s Campaign to Preserve Import Restraints” by Dan Ikenson (no. 25; October 15,2003)

“The Trade Front: Combating Terrorism with Open Markets” by Brink Lindsey (no. 24; August 5, 2003)

“Whither the WTO? A Progress Report on the Doha Round” by Razeen Sally (no. 23; March 3, 2003)

“Free Trade, Free Markets: Rating the 107th Congress” by Daniel Griswold (no. 22; January 30, 2003)


“Reforming the Antidumping Agreement: A Road Map for WTO Negotiations” by Brink Lindsey and Dan Ikenson (no. 21; December 11, 2002)

“Antidumping 101: The Devilish Details of ‘Unfair Trade’ Law” by Brink Lindsey and Dan Ikenson (no. 20; November 26,2002)

“Willing Workers: Fixing the Problem of Illegal Mexican Migration to the United States” by Daniel Griswold (no. 19;October 15, 2002)

“The Looming Trade War over Plant Biotechnology” by Ronald Bailey (no. 18; August 1, 2002)

“Safety Valve or Flash Point? The Worsening Conflict between U.S. Trade Laws and WTO Rules” by Lewis Leibowitz (no. 17; November 6, 2001)

“Safe Harbor or Stormy Waters? Living with the EU Data Protection Directive” by Aaron Lukas (no. 16; October 30, 2001)

“Trade, Labor, and the Environment: How Blue and Green Sanctions Threaten Higher Standards” by Daniel Griswold (no. 15; August 2, 2001)

“Coming Home to Roost: Proliferating Antidumping Laws and the Growing Threat to U.S. Exports” by Brink Lindsey andDaniel Ikenson (no. 14; July 30, 2001)

“Free Trade, Free Markets: Rating the 106th Congress” by Daniel T. Griswold (no. 13; March 26, 2001)

“America’s Record Trade Deficit: A Symbol of Economic Strength” by Daniel T. Griswold (no. 12; February 9, 2001)

“Nailing the Homeowner: The Economic Impact of Trade Protection of the Softwood Lumber Industry” by Brink Lindsey,Mark A. Groombridge, and Prakash Loungani (no. 11; July 6, 2000)

“China’s Long March to a Market Economy: The Case for Permanent Normal Trade Relations with the People’s Republic ofChina” by Mark A. Groombridge (no. 10; April 24, 2000)

“Tax Bytes: A Primer on the Taxation of Electronic Commerce” by Aaron Lukas (no. 9; December 17, 1999)

“Seattle and Beyond: A WTO Agenda for the New Millennium” by Brink Lindsey, Daniel T. Griswold, Mark A.Groombridge, and Aaron Lukas (no. 8; November 4, 1999)

“The U.S. Antidumping Law: Rhetoric versus Reality” by Brink Lindsey (no. 7; August 16, 1999)

“Free Trade, Free Markets: Rating the 105th Congress” by Daniel T. Griswold (no. 6; February 3, 1999)

“Opening U.S. Skies to Global Airline Competition” by Kenneth J. Button (no. 5; November 24, 1998)

“A New Track for U.S. Trade Policy” by Brink Lindsey (no. 4; September 11, 1998)

“Revisiting the ‘Revisionists’: The Rise and Fall of the Japanese Economic Model” by Brink Lindsey and Aaron Lukas (no. 3; July 31, 1998)

“America’s Maligned and Misunderstood Trade Deficit” by Daniel T. Griswold (no. 2; April 20, 1998)

“U.S. Sanctions against Burma: A Failure on All Fronts” by Leon T. Hadar (no. 1; March 26, 1998)


Trade Briefing Papers from the Cato Institute

“Trade, Protectionism, and the U.S. Economy: Examining the Evidence” by Robert Krol (no. 28; September 16, 2008)

“Race to the Bottom? The Presidential Candidates’ Positions on Trade” by Sallie James (no. 27; April 14, 2008)

“Maladjusted: ‘Trade Adjustment Assistance’” by Sallie James (no. 26; November 8, 2007)

“Grain Drain: The Hidden Cost of U.S. Rice Subsidies” by Daniel Griswold (no. 25; November 16, 2006)

“Milking the Customers: The High Cost of U.S. Dairy Policies” by Sallie James (no. 24; November 9, 2006)

“Who’s Manipulating Whom? China’s Currency and the U.S. Economy” by Daniel Griswold (no. 23; July 11, 2006)

“Nonmarket Nonsense: U.S. Antidumping Policy toward China” by Daniel Ikenson (no. 22; March 7, 2005)

“The Case for CAFTA: Consolidating Central America’s Freedom Revolution” by Daniel Griswold and Daniel Ikenson (no. 21; September 21, 2004)

“Ready to Compete: Completing the Steel Industry’s Rehabilitation” by Dan Ikenson (no. 20; June 22, 2004)

“Job Losses and Trade: A Reality Check” by Brink Lindsey (no. 19; March 17, 2004)

“Free-Trade Agreements: Steppingstones to a More Open World” by Daniel T. Griswold (no. 18; July 10, 2003)

“Ending the ‘Chicken War’: The Case for Abolishing the 25 Percent Truck Tariff ” by Dan Ikenson (no. 17; June 18, 2003)

“Grounds for Complaint? Understanding the ‘Coffee Crisis’” by Brink Lindsey (no. 16; May 6, 2003)

“Rethinking the Export-Import Bank” by Aaron Lukas and Ian Vásquez (no. 15; March 12, 2002)

“Steel Trap: How Subsidies and Protectionism Weaken the U.S. Industry” by Dan Ikenson (no. 14; March 1, 2002)

“America’s Bittersweet Sugar Policy” by Mark A. Groombridge (no. 13; December 4, 2001)

“Missing the Target: The Failure of the Helms-Burton Act” by Mark A. Groombridge (no. 12; June 5, 2001)

“The Case for Open Capital Markets” by Robert Krol (no. 11; March 15, 2001)

“WTO Report Card III: Globalization and Developing Countries” by Aaron Lukas (no. 10; June 20, 2000)

“WTO Report Card II: An Exercise or Surrender of U.S. Sovereignty?” by William H. Lash III and Daniel T. Griswold (no. 9; May 4, 2000)

“WTO Report Card: America’s Economic Stake in Open Trade” by Daniel T. Griswold (no. 8; April 3, 2000)

“The H-1B Straitjacket: Why Congress Should Repeal the Cap on Foreign-Born Highly Skilled Workers” by SuzetteBrooks Masters and Ted Ruthizer (no. 7; March 3, 2000)

“Trade, Jobs, and Manufacturing: Why (Almost All) U.S. Workers Should Welcome Imports” by Daniel T. Griswold (no. 6;September 30, 1999)


Board of Advisers

James Bacchus Greenberg Traurig LLP

Jagdish BhagwatiColumbia University

Donald J. BoudreauxGeorge Mason University

Douglas A. IrwinDartmouth College

José PiñeraInternational Center forPension Reform

Russell RobertsGeorge Mason University

Razeen SallyLondon School ofEconomics

George P. ShultzHoover Institution

Clayton YeutterFormer U.S. TradeRepresentative

The mission of the Cato Institute’s Center for Trade Policy Studies is to increase publicunderstanding of the benefits of free trade and the costs of protectionism. The center

publishes briefing papers, policy analyses, and books and hosts frequent policy forums andconferences on the full range of trade policy issues.Scholars at the Cato trade policy center recognize that open markets mean wider choices

and lower prices for businesses and consumers, as well as more vigorous competition thatencourages greater productivity and innovation. Those benefits are available to any countrythat adopts free-trade policies; they are not contingent upon “fair trade” or a “level playingfield” in other countries. Moreover, the case for free trade goes beyond economic efficiency.The freedom to trade is a basic human liberty, and its exercise across political borders unitespeople in peaceful cooperation and mutual prosperity.The center is part of the Cato Institute, an independent policy research organization in

Washington, D.C. The Cato Institute pursues a broad-based research program rooted in thetraditional American principles of individual liberty and limited government.

For more information on the Center for Trade Policy Studies,visit www.freetrade.org.

Other Trade Studies from the Cato Institute

“A Harsh Climate for Trade: How Climate Change Proposals Threaten Global Commerce”by Sallie James, Trade Policy Analysis no. 41 (September 9. 2009)

“Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform” byPeter B. Dixon and Maureen T. Rimmer, Trade Policy Analysis no. 40 (August 13, 2009)

“Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade Consensus”by Daniel Ikenson and Scott Lincicome, Trade Policy Analysis no. 39 (April 28, 2009)

“A Service to the Economy: Removing Barriers to ‘Invisible Trade’” by Sallie James, TradePolicy Analysis no. 38 (February 4, 2009)

“Trade, Protectionism, and the U.S. Economy: Examining the Evidence” by Robert Krol,Trade Briefing Paper no. 28 (September 16, 2008)

“While Doha Sleeps: Securing Economic Growth through Trade Facilitation” by DanielIkenson, Trade Policy Analysis no. 37 ( June 17, 2008)

CENTER FOR TRADE POLICY STUDIES

Nothing in Trade Policy Analysis should be construed as necessarily reflecting the views of theCenter for Trade Policy Studies or the Cato Institute or as an attempt to aid or hinder the pas-sage of any bill before Congress. Contact the Cato Institute for reprint permission. Additionalcopies of Trade Policy Analysis studies are $6 each ($3 for five or more). To order, contact theCato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001. (202) 842-0200, fax (202) 842-3490, www.cato.org.

Documents

How Global Economic Integration Renders Trade Policy