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