What zebras can teach us about international trade

4th July, 2024

It’s not often that you can squeeze zebras into a column about trade tariffs, but against the backdrop of a trade war over electric vehicles, with the US election, the Chinese economy and the global climate at stake, let’s try. The Biden administration is imposing heavy tariffs on Chinese goods, especially electric vehicles.

Medium term, the effect will be to block cheap EVs entering the US market, which is bad for the planet, bad for American consumers and great for anyone else who wants to make EVs in, or sell EVs to, the US.

But long term? The long game is to try to shift the structure of the US economy towards the manufacturing of green technologies such as solar panels, batteries and electric cars. Might that work? That’s where the zebras come in.

Consider a simplified model of a savannah. Grass grows in the sun. Zebras eat the grass. Lions eat the zebras. And because it’s not much of a model without a technical term, let’s introduce one: the trophic level. The trophic level of the sun is zero. The grass has a trophic level of one, the zebras two and the lions have a trophic level of three.

Of course it all gets more complicated. Warthogs eat plants, but they might eat a dead zebra or even a dead lion. So a warthog might have a trophic level of, say, 2.1. All this is useful stuff to think about if you’re modelling the ecology of the savannah. Useful, too, if you’re thinking about the structure of an economy.

Two complexity scientists, James McNerney and Doyne Farmer, have suggested looking for analogies to trophic levels in economies. It’s not that an economy has a food chain or an apex predator, as such. But economies do have lots of interdependent industries, and the mathematics of trophic levels offers a promising way to analyse them.

In an economic setting, let’s define the trophic level of zero as being individuals. A widget industry that uses only human labour has a trophic level of one. A sprocket industry that uses a 50:50 mix of workers and widgets has a trophic level of 1.5, and so on. The more links there are in an industry’s supply chain, the higher its trophic level. Does that mean that industries with a high trophic level are more sophisticated? No more than lions are more sophisticated than zebras. But the trophic level does matter.

McNerney, Farmer and colleagues used data from the World Input-Output Database to calculate the trophic levels of different industries in the US, China and other countries. They found that the Chinese economy is full of industries with a trophic level higher than four, whereas the highest trophic level of a major US industry is food manufacturing, at just over 3.5. Many large US industries, including health, retail and defence, have a low trophic level of about 2. Trophic levels aren’t fixed. US agriculture is highly mechanised and has a trophic level above 3, while Chinese agriculture is a labour-intensive activity with a trophic level below 2.5.

Policymakers in the US say they want to defend US manufacturing jobs from Chinese competition. There are some plausible security reasons, and some implausible ones, but this is also an attempt to raise the trophic level of the US economy. Is that desirable? Low trophic levels notwithstanding, the typical US citizen enjoys a far higher standard of living than those in China. But, as Farmer explains in his recent book Making Sense of Chaos, there is an advantage to high-trophic-level industries. They tend to get more efficient more quickly.

The reason is simple, almost mechanical: an industry with no suppliers has only one possible source of technological improvement, itself. An industry with a deep supply chain profits when any company in that chain improves. McNerney has found that, for the typical industry, about two-thirds of technological improvements come from suppliers and only one-third are made internally.

This simple theory makes some assumptions that may be wrong, but when McNerney, Farmer and colleagues looked at the data, they found the evidence accorded with the theory. Economies with higher trophic levels are more innovative and tend to grow more quickly. The theory also explains the vague, yet widely held, belief that there is something special about manufacturing. What’s special is that manufacturing often has a high trophic level.

Many voters will applaud the new US tariffs on China. Should they? Farmer tells me that “an industrial policy that supports industries with deep supply chains, raising the trophic level of the economy, should result in faster GDP growth and stronger increases in productivity”.

That leaves open the question of whether tariffs are the right way to nurture such industries. Decades of rhetoric about protecting “infant industries” have tried to obscure the fact that tariffs usually protect old, fading industries rather than young, growing ones. These new tariffs, by contrast, are protecting young, fast-growing market sectors. So perhaps this time things will be different.

I would dearly like to believe that the tariffs will be a springboard to healthy global competition to make zero-emission technologies. But even economists are sometimes prone to wishful thinking. Maybe I have been swept away by the romance of the savannah.

Written for and first published in the Financial Times on 7 June 2024.

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