Economics | International Trade and North–South Industrial Location | #economics

International trade is one of the prerequisites of economic growth of modern countries. Two centuries ago, Ricardo put forward his model which lies behind the theory of international economics and is based on absolute advantages and comparative advantages determining what goods countries need to produce in order to sell them as profitably as possible beyond their borders. That reasoning opened the world for globalisation and countries started to come closer towards each other. A brilliant example could be the European integration whose main goal was to get rid of trade tariffs between its participants. In this post we are going to discuss both benefits and drawbacks of trade liberalisation and will have a look at how the issue of North-South Industrial Integration is treated by international and environmental economics.  | #economics

International Trade and North-South industrial integration

International Economics and the Model of North-South Industrial Integration

The model of north-south industrial integration stands for the regional (economic) integration between developed and developing regions or countries. The term 'north' refers to the developed (rich) countries and 'south' means developing (poor) countries. The origin of this notion comes down to the times when northern countries were more economically developed than southern countries. An example from the history of European integration would be the EU-Mediterranean partnership. With the advancement of technological progress, geographical position has lost its relevance, but the association with the factor endowment of the north and the south remained.

North-south industrial integration involves first and foremost trade liberalisation between the participant regions. According to the model, the north is capital abundant and the south is labour abundant. The countries benefiting from free trade agreements can now specialise on their comparative advantages and absolute advantages, according to the theory of Ricardo. The north-south industrial location gives the countries namely an incentive to specialise on what they can produce more efficiently and, therefore, cheaper. The rich ('northern') regions can develop technologically intensive (and more capital abundant) industries, whereas the poor ('southern') countries benefiting from cheap labour can concentrate on less advanced industries.   

Why some countries are rich and some are poor? The question asked by the macroeconomic discipline of Economic Growth, is too large and preconceives a lot of factors such as mentality and capital accumulation which are not susceptible to a straightforward and easy change. Theoretically, with time passing the south and the north are supposed to catch up. In practice, however, it happens slowly as the discipline of Economic Growth shows. Thus, for the time being the north and the south regions can benefit from their economic endowment because the new conditions of trade liberalisation are beneficial for both sides. Nevertheless, certain problems may arise due to the dynamic change in economic growth mentioned before. Let's now have a closer look at the problems arising in the north and the south and related to the different factor endowment in the regions. 

The Problems of North-South Industrial Location

NORTH | Social Dumping in International Economics

One of the problems of the regional integration is that in most cases the participating countries have different economic levels. As a result, what is initially considered as benefits can turn out to be disadvantages in the long and even in the short run. For instance, in countries with different salary levels a problem of social dumping may arise.

Workers from countries with a lower salary coming to the country with a higher salary is not social dumping as such. What is, however, considered as social dumping is the fact that people from a country with a lower salary may and - in the majority of cases - will accept work in the high salary country for the price that is much lower than the average worker in the rich region would accept. What follows is that the average salary level (together with all sorts of other boons such as social benefits etc.) fall below the acceptable levels. 

SOUTH | Pollution Havens in Environmental Economics

In environmental economics, another phenomenon is known which arises due to regional integration and trade liberalisation. The phenomenon of pollution havens consists in variations of environmental standards between countries. Normally, environmental standards in rich countries are tougher than those in poor ones. Therefore, the rich regions migrate some of their dirty production to the poor regions which have weaker or even non-existent environmental regulations, thus profiting from cheap labour force and lax environmental standards.

The so-called pollution havens (similar to tax havens in some respect) appear due to the fact that the poor 'jurisdictions' (regions) decrease their environmental standards. As a result, both regions gain in economic development and specialisation. The rich regions may specialise on technologically intensive, capital abundant and less 'dirty' domains, whereas the poor regions enhance their production potential and increase their trade volume by accepting migration of dirty industries on their territory. For poor regions who seize the opportunity to contribute to their economic growth (by increasing the GDP), the situation of being a pollution haven may result in poor environmental outcomes.