8hrs. 2 Econ summaries, 250 words each

pinion I What Covid Vaccine Supply Tells Us About International... https://www.nytimes.com/2021/08/06/opinion/covid-vaccine-suppl.

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Wonking Out: What Vaccine Supply Tells Us About International Trade

rt By Paul Krugman Opinion columnist

Aug.6,2021

This article is a wonky edition of Paul Krugman's free newsletter. You can sign up here to receive it.

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For many of us, Chad Bown of the Peterson Institute for International Economics - a boutique think tank specializing in, duh, international economics - has become the go-to guy for current developments in trade policy. His work tracking the evolution of Donald Trump's trade war was invaluable.

Now he has a highly informative new paper with Thomas Bollyky on the vaccine supply chain. I won't lie: There's a lot of detail, and the paper is fairly heavy going. But it's full of useful details, and it also, I'd argue, tells us some interesting things about the nature of world trade in the 21st century.

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)pinion I What Covid Vaccine Supply Tells Us About International... https:/ /www.nytimes.com/202 l/08/06/opinion/covid-vaccine-suppl..

One thing that caught my eye - probably not the most important thing, but

one close to my heart - is that the story of global vaccine production

demonstrates the continuing relevance of the so-called New Trade Theory, or

as some now call it, the "old New Trade Theory."

Background: Here's a sample graphic from Bown and Bollyky, showing

what's involved in the production of the Pfizer vaccine:

b. Partners and facilities involved in Pflzer/BloNTech vaccine production as of June 30, 2021

; Lipid production ; Drug substance and ; FIii and finish ; Dellvery

US firms

Avanti Polar lipids, Alabama

AMRI, New York

Pfizer, Connecticut

European firms

Croda. Snaith. UK

Polyrnun, Klosterneuburg. Austria

Evonik, Hanau, Germany

Evonik, Dossenheim. Germany

Merck KGaA, ' Darmstadt. Germany

, drug product formulation I

(Firms handle different parts or production process)

us firms Pfizer Pfizer

Missouri Massachusetts

Exelead Pfizer Indiana Michigan

European firms

BioNTech Mainz,

Germany

BloNTech Marburg, Germany

Pfizer Puurs,

Belgium

Pfizer, Dublin, Ireland

Dermapharm, I Dermapharm, Brehna, R.einbek,

Germany Germany

AGC Biologics, Heidelberg, Germany

US firms

Pfizer, Michigan

Pfizer. Kansas

European firms

Pfizer, Puurs, Belgium

Siegfried, Hameln, Germany

Delpharm, Saint-Remy, France

Sanofl, Frankfurt, Germany

Novartis, Stein, Switzerland

Thermo Fisher, Monza, Italy

I

Source: Constructed by the authors based on firm announcements and media reports. See table A.l In the appendix for timing.

The shots made round the world. Peterson Institute for International Economic

Distribution

Producing these vaccines is evidently a complicated process, involving

facilities in many locations, presumably implying a lot of cross-border

shipments of vaccine ingredients. Notably, in Pfizer's case all these facilities

are in the United States and Western Europe, which is typical across pharma

firms, although other companies have a few facilities in Brazil and India.

So where do vaccine supply chains fit into the theory of international trade?

inion l What Covid Vaccine Supply Tells Us About International... https://www.nytimes.com/2021 /08/06/opinion/covid-vaccine-suppl ...

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If you've ever taken an economics course, you probably learned about the theory of comparative advantage, which says that countries trade to take advantage of their differences. The classic original example, from the early- 19th-century economist David Ricardo, involved the exchange of English cloth for Portuguese wine.

Comparative advantage is a powerful, illuminating theory - especially because it shows why countries export goods they're relatively good at producing even if they're less productive in those industries than potential competitors. Bangladesh is a low-productivity nation across the board ( although it has been improving), but its productivity disadvantage is less pronounced in apparel than in other industries, so it has become a major clothing exporter.

In the 1960s and 1970s, however, a number of economists began suggesting that comparative advantage was an incomplete story. World trade had been growing over time, but much of that growth involved trade between countries that didn't seem very different - the United States and Canada, for example, or the nations of Western Europe. Furthermore, what these countries were selling to each other looked pretty similar: There was a lot of "intra-industry" trade like the large-scale, two-way trade in autos and related goods across the U.S.-Canada border.

What was going on? A few economists had long noted that comparative advantage wasn't the only possible reason for international trade. Countries might also trade because production of some goods involves increasing returns - there are advantages to large-scale production, which creates an incentive to concentrate production in a few countries and export those goods to other countries. Automotive trade between the United States and Canada was a classic example: After the countries established a free-trade agreement for autos in 1965, North American car companies achieved economies of scale by limiting the range of items produced in Canada,

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1 ion I What Covid Vaccine Supply Tells Us About International...

bttps://www.nytimes.com/2021 /08/06/opinion/covid-vaccine-supi

exporting these goods and importing other items from the United States.

But if trade reflected increasing returns rather than country characteristics, which countries would end up producing which goods? It might be largely random, the result of accidents of history.

There was, however, remarkably little economic literature on increasing- returns trade until the late 1970s. Economists don't like to talk about stuff they find hard to model, and trade models with increasing returns tended to be messy and confusing. Eventually, however, some economists came up with clever ways to cut through the confusion, in papers like this 1980 piece in the American Economic Review:

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Scale Economies, Product Differentiation, and the Pattern of Trade

By PAUL KrtuoMAN•

For SOfllC time now there hu been oon- siderablc skepticism about the abiUty of comparative COit theory to explain the ae> tua1 pattern of international trade. Neither the oxtensive trade among the indU1trial countries. nor the prevalence in this trade of tw&Way excb•ngf'.S of differentiated prod- ucts, make much sense in tenns of standard theory. As a result, many people have oon- duded that a new framework for analyung ttade is needed.1 The main elements of such a framework-economics of scale, the pos- sibility of product differentiation. and im· perfect competition- have been discussed

from trade even ir the economies have iden- tical tastes, technology, and factor Clldow• men~ This basic model or trade is pre- sented in Section I. It is clotely related to a model I have developed elsewhore; in this paper a somewhat more restrictive formula,. tion of demand is used to make the analysis in later sections easier.

The rest or the paper is concerned with two extensions of the basic model. In Sec• ~on II, I examine the effect of transporta- tton cost&, and show that countries with larger domestic m.arkets will, other things equal, have higher wage rates. Section 111

Niftiness is necessary. American Economic Review

(I'll note, with all due immodesty, that the journal would later name this one of the 20 top papers published in its first century of operation.)

God, I was young!

pinion I What Covid Vaccine Supply Tells Us About International... I

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Anyway, history has a sense of humor. No sooner had economists come up

with nifty models of trade between similar countries, driven by economies of

scale, than the world economy took a hard turn away from that kind of trade

toward trade between dissimilar countries driven by things like large

differences in wages.

World trade exploded from the mid-1980s until around 2008, a process

sometimes called hyperglobalization:

Merchandise trade(% of GDP)

World Trade Organization, and World Bank GDP estimates.

License : CC BY-4.0 0

Li ne Bar Map

'Ill

Globalization gets hyper. world Bank

< Share (D Details

m LABEL

And where trade growth in the '60s and '70s had largely involved advanced

economies selling stuff to each other, hyperglobalization involved a surge in

exports of manufactured goods from relatively low-wage developing

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Opinion I What Covid Vaccine Supply Tells Us About International... https://www.nytimes.com/2021/08/06/opinion/covid-vaccine-suppl ...

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countries:

5

4

3

2

1

0

Developing country manufactures exports as% of world GDP

1985 2008

Everything old was new again. World Bank I

So we had a New Trade Theory, but the new trade we were actually getting

was much better explained by, well, old trade theory.

So what does all this have to do with vaccine supply chains? Well, as I

already noted, vaccine ingredients are mainly produced in advanced

countries - countries that are very similar in their education levels, overall level of technological competence and more. So why wasn't each advanced

country producing the whole ensemble of vaccine-related inputs? Here's what Bown and Bollyky say:

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)n I What Covid Vaccine Supply Tells Us About International... https :/ /www. nytim es .com/2021/08/06/ opinion/ covid-vaccine-suppl ...

"The business model that much of the pharmaceutical industry had shifted toward over the previous 25 years involved fragmentation. As tariffs and other trade barriers had fallen globally, information and communications technology (I CT) developed, shipping and logistics efficiency increased, and protection of intellectual property rights steadily improved. The fact that trade could play a greater role in distributing pharmaceutical products globally meant that companies could operate fewer plants but at a larger scale." (Emphasis mine.]

Hey, it's New Trade Theory in action! And it sure looks as if there was a lot of random historical contingency determining national roles in the pattern of specialization. Europe was initially very dependent on Britain's exports of lipids - but I doubt that there's something about British culture that makes the country especially good at lipids. It's just one of those accidents that play a big role in economic geography.

Is there a moral to this story? There's been a lot of backlash against globalization over the past decade, to some extent justified: Advocates of free-trade agreements oversold their benefits and understated the disruptions they might cause. But the case of vaccine production illustrates a positive side of globalization we tend to forget. These miracle vaccines are incredibly complex products that would have been hard to develop and produce in any one country, even one as large as the United States. A global market made it possible to deliver all the specialized inputs that are saving thousands of lives as you read this.

The Times is committed to publishing a diversity of letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our email: [email protected].

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Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @Paul Krugman

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