Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete

A new study from Daniel Ikenson, associate director of Cato's Center for Trade Policy Studies, says trade policy needs to catch up to the reality of today's globalized economy.

December 2, 2009

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During the past few decades, a truly global division of labor has emerged, presenting opportunities for specialization, collaboration, and exchange on scales once unimaginable. The confluence of falling trade and investment barriers, revolutions in communications and transportation, the opening of China to the West, the collapse of communism, and the disintegration of Cold War political barriers has spawned a highly integrated global economy with vast potential to produce greater wealth and higher living standards.

The factory floor is no longer contained within four walls and one roof. Instead, it spans the globe through a continuum of production and supply chains, allowing lead firms to optimize investment and output decisions by matching production, assembly, and other functions to the locations best suited for those activities. Because of foreign direct investment, joint ventures, and other equity-sharing arrangements, quite often “we” are “they” and “they” are “we.” And because of the proliferation of disaggregated, transnational production and supply chains, “we” and “they” often collaborate in the same endeavor. In the 21st century, competition is more likely to occur between entities that defy national identification because they are truly international in their operations, creating products and services from value-added activities in multiple countries. There is competition between supply chains, but only after there is cooperation and collaboration within supply chains.

But trade and investment policy has not kept pace with these remarkable changes in commercial reality. Our globally integrated economy requires policies that are welcoming of imports and foreign investment and that minimize regulations or administrative frictions based on misconceptions about some vague or ill-defined “national interest.” To nurture the promise of our highly integrated global economy, governments should commit to policies that reduce frictions throughout the supply chain — from product conception to consumption — as well as in the flow of services, investment, and human capital.

Click here to read the full paper.