Supply Chains Need Policy Attention

 Supply chains – trade, investment and IP agreements

 A constant refrain in the developed world is that their economies have become service economies with the loss of good manufacturing jobs. In 2016, the Canadian labour force is assigned almost eighty percent to services, and ten percent to manufacturing, (agriculture is less than two percent)….see http://www.statcan.gc.ca/pub/71-001-x/2016003/t002-eng.pdf. The conclusion reached by some is that the country is losing good manufacturing jobs and gaining lower paying service sector jobs.

This is only partly the case. What is also happening is a restructuring of employment in firms assigned to particular industries. An example would be an automotive firm, which employs in-house lawyers and accountants and has an advertising department, deciding to contract out these services to independent law, accounting and advertising firms. In the first instance these people are counted as part of a manufacturing firm’s labour force, and in the second case as service sector workers.

This is happening in North America and in other industrialized economies. The production of many goods and services are being reorganized, with the use of the term supply-chain management reflecting these changes. For example, at one time the parts and other inputs required to produce a car might all be done in one firm in one location, with the stages of production taking place onsite in a vertically integrated firm. Today, the industry is often made up of numerous firms, which provide the inputs (body, transmission, engine, brakes, design, advertising, financing and sales). These parts are now broken up and undertaken by different firms, which then trade with each other within or between countries. Outsourcing is another name for this process, which has a number of policy implications. It is not just of interest to industrial organization policy wonks. This is another case of Orwell’s warning about not paying attention that to what is going on in front of one’s nose.

A major implication is that a country, which fails to sign on to multilateral agreements affecting trade, investment and intellectual property in goods and services, may experience adverse economic consequences. See the Conversable Economist posting for March 14, 2016.

http://conversableeconomist.blogspot.ca/search?updated-max=2016-03-16T08:00:00-05:00&max-results=7

and Richard Baldwin, “The World Trade Organization and the Future of Multilateralism,” Journal of Economic Perspectives, Winter 2016, who writes as follows:

“[T]he rules and procedures of the WTO were designed for a global economy in which made-here–sold-there goods moved across national borders. But the rapid rising of offshoring from high-technology nations to low-wage nations has created a new type of international commerce. In essence, the flows of goods, services, investment, training, and know-how that used to move inside or between advanced-nation factories have now become part of international commerce. For this sort of offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It’s possible to imagine a hypothetical WTO that would incorporate these rules. But in practice, the rules are being written in a series of regional and megaregional agreements like the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union. The most likely outcome for the future governance of international trade  is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks, or “global value chains,” are set by a decentralized process of sometimes overlapping and inconsistent megaregional agreements.”

“What all this suggests is that world trade governance is heading towards a two-pillar system. The first pillar, the WTO, continues to govern traditional trade as it has done since it was founded in 1995. The second pillar is a system where disciplines on trade in intermediate goods and services, investment and intellectual property protection, capital flows, and the movement of key personnel are multilateralised in megaregionals.”

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