What will the production technology of the future look
like? A recent Economist essay on 3D printing hypothesizes a third industrial revolution, in which small parts could
be “printed” on an individualized basis.
This would be a departure from the economies of scale that characterize
capital intensive industries, as one would no longer need to submit orders for
thousands of a specialized part; one prototype would get the job done.
But how will this transformation affect patterns of
international trade? Before arriving at
a conclusive claim on the effects on trade, it’s important to get some
perspective on the development of trade theory over the past few decades. Old trade circa Ricardo and Heckscher-Ohlin-Samuelson
was founded upon comparative advantage and natural factor endowments. Countries scarce in labor would import labor
intensive products, whereas countries scarce in capital would import capital
intensive products. This theory of trade
then failed to explain the fact that many capital rich countries tended to import capital intensive products! In a large scale test, HO predicted the
direction of trade across multiple industries with 49.8% accuracy – lower than
that of chance.
New Trade arose to explain these empirical irregularities by
incorporating monopolistic competition, internal scale economies, and transportation costs. Now that firms were monopolistically
competitive, intra-industry trade
began to play a much larger role. Because
the various firms in the capital intensive core could trade more cheaply with
other core firms for intermediate inputs, firms would aggregate in the
core. This dynamic would also create
home-market effects, in which an increase for the goods of an industry in the
core would create a proportionately higher increase of the production of that
good. Part of the new production goes to
feeding domestic industries, while the other part goes out to export as a
result of a more competitive industry.
However, recent innovations with respect to transportation
costs and communications technologies have reversed this trend. In the original model, transportation costs
functioned as a key reason for why intra-industry trade in the core
happened. Without transportation costs,
the firms in the core could trade with the firms in the periphery for
intermediate goods; there would be no home market effect. Such reversal of the
predictions of New Trade became readily more apparent as new data rolled
in. Even when Krugman was giving his
Nobel Prize acceptance speech for his work in trade theory, he noted that New
Trade theory was getting old. One of the
canonical examples of New Trade was the development of auto industries. Within the United States, “home market
effects” tended to aggregate auto production in the Midwest (Mitten State represent!). A Chicago Fed map of auto parts suppliers clearly illustrates this phenomenon:
Yet, in more recent times, a
substantial amount of auto production shifted to the south, where labor was
cheaper. In effect, scale economies were
overwhelmed by factor endowment advantages; new trade theory was becoming old.
This trend on the international level has been called by Baldwin
as “globalization’s second unbundling”. The
reduction of transportation costs and communication costs allows supply chains
to be more spread out over a larger region.
Intermediate goods don’t all need to be produced by one country. Rather, they can be produced by smaller firms
distributed over a larger region. While
Japan might be the home of Honda, the Thailand does much of the assembly, and
has prospered much more as a part of a new “factory Asia.” On the other hand, Malaysia tried the old
method of building the entire supply chain, and is doing substantially
worse. This new regionalism allows for a
greater diffusion of industry and, as a result, is more sensitive to initial
factor endowments, much like old trade.
It is in this light that we can analyze the prospects for 3D
printing on transforming the face of international trade. What will happen will depend crucially on
whether 3D printing will be generalized or specialized. If 3D printing uses very general materials,
then one firm could create key goods in a wide variety of industries. There would not be an auto parts supplier and
a tablet chip supplier; there would just be one 3D printing factory that could
produce all of the small components as needed.
On one hand, the versatility of 3D printing would allow one firm to There
would be less monopolistic competition as firms would not be as
differentiated. Taking away this key
source of internal economies of scale may accelerate the second unbundling as
there would be fewer reasons for firms to aggregate in one region.
On the other hand, if 3D printing is highly specialized,
then new firms would quickly proliferate to fill the various market
niches. Monopolistic competition would actually
heighten, creating more incentives for industries to agglomerate together. Along with the increase in oil and transportation costs, transportation from distant factories
may make it increasingly difficult for foreign factories to create the
specialized components that 3D printing would support. 3D printing would allow such a high level of
intra-industry trade. Especially if the
parts become highly specialized, it’s not that unreasonable to imagine that
certain 3D printing firms may create the critical components for other 3D
printers to continue their operations.
The result would be that we may return again to the world of New Trade
Theory, in which initial geographic distributions can have a large effect on
the movement and agglomeration of firms.
And as the original Economist article argues, this may result in a
return of companies to rich countries as firms try to capitalize on the larger
markets there.
With this possible transformation on the horizon, trade
policy becomes increasingly important as industrial organization now may become
even more fixed in the future. Yet the
fixed nature of trade may be an even stronger argument for higher labor
mobility. If factor mobility and free
trade are substitutes, global welfare will be best served by allowing the
citizens of poor countries to move to rich countries. If the firms don’t move, the people will.
Increasing agglomeration of firms will also have an effect
on currency unions and exchange rate pegging.
This was a key issue in the debate for the Eurozone:
As the EU moves towards a monetary union, it can be expected that the geographic concentration of industries will increase further, in line with developments so far, and paralleling United States experience (Krugman, 1991b). This, in turn, would raise the likelihood of asymmetric shocks affecting EMU member countries, thereby raising difficulties of adjustment in the absence of nominal exchange-rate instruments
If countries become increasingly heterogeneous and labor
mobility is still limited by de facto issues such as language and culture, national
sovereignty over monetary policy will be vital for each country’s stability.
With the technological revolution of 3D printing, New Trade
Theory may become relevant again. Globalization unbundled itself with the initial decrease in transportation costs that facilitated international trade. It then rebundled itself as monopolistic competition and intra-industry trade caused firms to agglomerate in a global core, away from the periphery. In recent times, the world has unbundled again with decreases in coordination costs allowing more regional supply chains. The future may hold a second rebundling, in which 3D printing causes firms to return to countries and retreat from deep global integration. This
will have massive implications for globalization and trade policy as we watch
these trends unfold in the coming decades.
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