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Shocks Hit Workers Twice In Offshoring Industries: Lessons From Mexico

Daniel Lederman's picture

Factory in Mexico. Source: Alan Grinberg -- http://www.flickr.com/photos/agrinberg/5536586224/The world is increasingly interconnected, and nowhere is a better example of that than the border between Mexico and the US. Lined with factories, the division between the two countries is blurred by a comprehensive trade agreement, international production chains, and other economic and social ties. On the Mexican side of the border, close to 3,000 factories import components and raw materials, workers assemble goods, and most of the finished products are destined for the US.

Is this good for Mexican workers? These export-oriented industries provide nearly two million jobs, a boon for development. But it turns out that these jobs can disappear quickly: the economic health of the US has a large impact on Mexican workers’ employment status, with downturns and booms amplified through a number of channels. Although the US economy is rarely volatile, this is an important finding that could have policy implications around the world. Mexico is similar to the increasing number of countries that have encouraged export-oriented industry as a strategy for development and enacted trade reforms integrating the local economy with the world market.

Evidence That Trade Does Reduce Poverty, But Only If the Conditions Are Right

Raju Jan Singh's picture

Market negotiations. Source: Raju Jan Singh/World Bank.While most economists accept that, in the long run, open economies fare better in aggregate than do closed ones, many observers fear that trade harms the poor. African countries, for example, have experienced significant improvements in trade liberalization in recent decades. But Africa remains the poorest continent in the world. It seems that the large gains expected from opening up to international economic forces have been limited in Africa, especially for poor people.

So does trade reduce poverty? In a recent World Bank Policy Research Working Paper, my colleague Maëlan Le Goff and I examine this question, looking at the connection between poverty and trade liberalization in 30 African countries between 1981 and 2000. Our results suggest that trade does tend to reduce poverty, but only in specific settings: in countries where financial sectors are deep, education levels high, and governance strong.

More Than the Sum of Its Parts: Why Logistics Matter for Your Kindle

Ben Shepherd's picture

Electronics Factory. Source: http://www.flickr.com/photos/poorlenz/22590873/sizes/m/in/photostream/Picture a global supply chain. The one that puts together the Amazon Kindle, for example: The flex circuit conductors are made in China, the wireless card is made in South Korea, and the tablet is assembled in Taiwan. The system works because each location specializes in something, whether it is relatively cheap labor, a cluster of machinery, or technical skills. But unlike a product made in a single factory, the Kindle’s components must cross borders.

The ease of crossing those borders – including through seaports or airports – is crucial to the production network. And, as it happens, fluidity is more important to trade in components than trade in final products. This makes sense, logically – it is easy to see how a whole holiday season’s worth of Kindles could be held up if the flex circuit conductors or wireless cards don’t get to Taiwan on time.

Why Is Trade More Costly For Poor Countries? A New Database Gives Us Some Answers

Jean-François Arvis's picture

Airplanes on a runway. Source: World Bank.It is far more expensive for Tunisia to trade manufactured goods with its next-door neighbor, Algeria, than to trade them with distant France. Similarly, the cost of trading agricultural goods between neighbors Algeria and Morocco is more than twice as high as it is between Algeria and Spain. What hinders countries that are so close to each other – and that share common languages and elements of culture – from exchanging goods?

This is one of the questions we sought to answer in developing a new trade costs database, which is a joint project between the World Bank and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). In constructing the database, we were initially motivated by a need to provide understandable estimates of trade costs to clients in North Africa. But the database has broader reach: being able to measure and explain the intensity of trade is of practical importance for many countries and for many aspects of our work at the Bank.

Some Types of Foreign Investment Are Better Than Others: A Look at Factors That Help FDI Boost the Local Economy

Thomas Farole's picture

Maseru, Lesotho, by night.Despite being a small, poor, landlocked country, Lesotho leveraged foreign direct investment (FDI) to become Africa’s largest apparel-exporting country, generating upwards of 50,000 jobs for its citizens. Neighboring Swaziland has also relied on foreign investors as the main source of exports, growth, and employment in its economy. Around the world, governments put significant resources into attracting foreign investors –through investment promotion, offering fiscal incentives, and establishing special economic zones, for example – in the hope of catalyzing their economies. And it’s not a bad strategy – FDI can bring significant benefits to developing country economies. It can generate employment, contribute to a country’s infrastructure and potentially bring in additional tax revenues.

Shifting Focus in Trade Agreements – From Market Access to Value-Chain Barriers

Bernard Hoekman's picture

Chain. Source: http://www.flickr.com/photos/pratanti/5359581911/Value chains are an ever more prominent feature of global commerce, with goods being processed – and value being added – in multiple countries that are part of the chain. No longer is trade as simple as manufacturing in one country and selling in another. Rather, goods often cross many borders, undergoing processing and accruing components in diverse settings before ending up in a retail store. A new database developed by the OECD and WTO provides greater clarity into value-added trade trends. Looking at the world through a “value-added” lens challenges our conventional thinking about trade policy, and in particular, the focus of where policy makers should be spending their efforts. This new perspective makes clear that to truly benefit from the dynamism of value chains, governments will need to cooperate in new ways -- with each other and with members of the private sector.

Re-thinking Trade Policy Priorities in a Supply-Chain-Driven World

Bernard Hoekman's picture

Supply trucks in Lao. Source: World Bank.A company importing desktop computers into Russia expects border processing times of up to six weeks. Chinese customs authorities take so long inspecting drug shipments that a global healthcare company must hold nine days’ worth of inventory. Concerned about the prevalence of theft, a cell phone manufacturer must provide a security detail for overland shipments in Mexico.

These are examples of the supply chain barriers that, as a whole, are more detrimental to world trade than tariffs, according to a new report, Enabling Trade: Valuing Growth Opportunities, released today at the World Economic Forum in Davos. The study, a collaborative effort between Bain & Co., the World Bank and the World Economic Forum, concludes that a concerted effort to reduce supply chain barriers to levels observed in the best performing countries could increase global GDP by some 4.7 percent – six times more than what could be achieved from eradicating all remaining import tariffs.

Welcome to The Trade Post

Mona Haddad's picture

A trading post from the old west. Source: http://www.flickr.com/photos/reservatory3/Welcome to The Trade Post, the World Bank’s new blog on international trade. Here, our trade experts will share their research, observations and questions. We will post when a new, interesting trade study is published or when a solution to one country’s trade policy issue might be applicable to others. We will discuss data, trends and complex ideas. But, above all, our goal is to make our work accessible and understandable, and we hope to engage a wide audience.

Some of our past blogging – originally published elsewhere in the World Bank– can be found here in our archive. We have remarked on the ways extreme flooding in Thailand exposed the vulnerability of supply chains, pointed out political hurdles to infrastructure planning in Africa, and described Indonesia’s efforts to make its main port more efficient. We believe that, while some of the issues we address are technical, we find them fascinating and we should be able to explain them to any layperson willing to listen.

Uncertainty and the Wait-and-See Effects on Trade

Daria Taglioni's picture

If your job were suddenly in jeopardy, and you couldn’t predict next month’s income, you might put off buying that new car you had been eyeing. Similarly, an appliance company faced with sudden hardship among its customer base might delay building a new refrigerator-manufacturing plant. It turns out that uncertainty affects international trade flows, too. In a working paper published by the World Bank’s International Trade Department, we explore how that uncertainty hurts some types of trade more than others.

Our recent working paper, “Innocent bystanders: How foreign uncertainty shocks harm exporters,” is an attempt to address a shortcoming in scholars’ ability to anticipate the trade-related impacts of crises. In 2008, for example, trade economists failed to predict the drop in international commerce that followed the collapse of Lehman Brothers, an event that shook the global financial system. More recently, trade economists have failed to capture the full impact of the European debt crisis on exporters across the globe. While models and simulations have been getting better, the impacts of such shocks on trade are still poorly understood. Our research explores a theory that places exceptional uncertainty at the beginning of a chain-reaction that ultimately slows trade.

The Mysterious Case of Chilean Service Exports

Sebastián Sáez's picture

Chile has long been known as a superstar in liberalization reforms and innovative export-led growth strategies. The country successfully exports tourism and transportation services. But these successes are, in some ways, yesterday’s news. The country’s performance in more modern service exports – internet and communications technology, business process outsourcing and others – has been less remarkable. Chile is no India.

What does this mean for a country that has famously followed sound economic policies? Is the government doing something wrong? Is the country stuck? A look at the way services data is interpreted may provide a different answer. Perhaps Chile’s reputation is simply a victim of statistical inaccuracies.

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