Student Perspective | Free Trade Evolved: Global Value Chains and Security Considerations

Tower Center Undergraduate Research Fellow Stephen Frantz attended the SMU Tower Center Sun & Star Program “Global Value Chains, Free Trade Agreements & Regional Security in the Asia-Pacific” featuring Dr. Hiroki Takeuchi, director of the Sun & Star Program, and his research. Frantz wrote about what he learned.

“The United States has become increasingly more protectionist over the last two to three years, and rhetoric regarding the ills of free trade has abounded. Dr. Hiroki Takeuchi’s lecture on November 6th analyzed new developments in free trade, documented the challenges that come with crafting sensible trade agreements, and pressed the importance of a commitment to free trade as a peacekeeper.

The 19th and 20th centuries saw states trading goods produced solely within their own borders. However, the last 25-30 years have seen an evolution in communication technology, which has created a striking change in international trade. All stages of production no longer have to take place within close proximity of each other; companies can now manage different stages of production from thousands of miles away. Instead of goods being produced within countries, goods are now being produced across countries. These new production networks, where various countries add value to a good by producing or assembling different parts of that good, are called global value chains (GVCs).

In his lecture, Dr. Takeuchi explained the consequences of the rise of the GVC. One such consequence is that technology stays within firms but is transferred across countries where labor costs are lower, resulting in more efficient production. Additionally, the trade deficit has become an inaccurate measure of the benefits of trade. The iPhone is one hypothetical example of such inaccuracy. In the United States, Apple designs the iPhone, which adds $50 of value to the phone, and then has it produced in several other countries. Once it gets to China, the phone is worth $750. China assembles the phone and ships it to the United States for $760, profiting $10. The resulting U.S. trade deficit with China is $710 per iPhone. However, Apple (a US company) marks up that price and sells it worldwide for a large profit, while China only profits $10 per iPhone assembled.

Both countries gain from trade, but the trade deficit fails to account for these benefits.

Dr. Takeuchi also discussed the unique challenges global value chains pose for the regulation of international trade. The World Trade Organization (WTO), containing over 160-member states, is designed to create trade rules. However, the disagreement resulting from the size of the WTO keeps the organization from updating trade rules to reflect the evolving interests of its members. Alternatively, mega free trade agreements (Mega-FTAs) have been used by many states to craft new trade rules. One example of such an FTA is the Comprehensive and Progressive Agreement of the Trans-Pacific Partnership (CPTPP), which has eleven members. This agreement tackles a myriad of issues that the WTO could not agree on, like customs, tariffs, labor conditions, e-commerce, and state-owned enterprise reform.

Finally, Dr. Takeuchi analyzed the security implications of free trade. Statistical analysis has borne out the conclusion that states with lower trade barriers (e.g. tariffs), stronger property rights protections, and smaller public sectors will not wage wars with similar states. When states do not have these properties, they are more likely to wage war. From Dr. Takeuchi’s analysis of current research, it appears that when two states take protectionist stances and have a high trade volume, the chance of militarized conflict is higher than if the trade volume was low or if the states supported free trade. The conflict between China and the United States is one example of two countries that take protectionist stances but have a high trade volume. This is not to say that the United States and China will eventually wage war, but that tensions between the two countries can only be relieved with a greater emphasis on free trade.

The issue, then, is how to solve the problem of international conflict between such states. Dr. Takeuchi proposes the idea of capitalist peace: peace through FTAs that require countries to reform their economies. Theoretically, economic incentives can convince states to join free trade initiatives, but a state structured like China, with its powerful central government, may not readily respond to such incentives. Within the Chinese government are reformers focusing on sustainable economic development through free trade and hardliners wishing to preserve the corruption in the state-owned enterprise system. As it stands now, the Chinese government is resisting any moves towards free trade. It is possible that geopolitical pressure from US economic presence in the East Asian region could add to the economic incentives posed by free trade, but the success of such a strategy is uncertain. In any case, the road to a peaceful world is one where nations trade freely with one another. The challenge is how one paves that road.”

Stephen Frantz is a junior at SMU majoring in Political Science, Philosophy, Statistics, and Human Rights with minors in International Studies and Law and Legal Reasoning. He is a part of the University Honors Program (UHP) and is a Tower Center Undergraduate Research Fellow.