Tuesday, October 29, 2019

The Hearing Aid Example: Why Technology Doesn't Reduce Trade

Will the new technologies of 3D printing and robotics  lead to a reduction in international trade? After all, IF countries can use 3D printing and robotics to make goods at home, why import from abroad?

But there is a fascinating counterexample to these fears: the case of hearing aids. Around the world, they are nearly 100% produced by 3D printing. But international trade in hearing aids is rising, not falling. Caroline Freund, Alen Mulabdic, and Michele Ruta discuss this and other examples in "Is 3D Printing a Threat to Global Trade? The Trade Effects You Didn’t Hear About" (World Bank Policy Research Working Paper 9024, September 2019). For a readable summary, the authors have written a short overview article at VoxEU as well.

The authors point to a prediction that 3D printing could eliminate as much as 40% of all world trade by 2040. But actual examples like hearing aids  don't seem to be working out this way. As they note:
3D printers transformed the hearing aid industry in less than 500 days in the mid-2000s, which makes this product a unique natural experiment to assess the trade effects of this technology. ... The intuition for the results is that 3D printing led to a reduction in the cost of production. Demand rose and trade expanded. There is no evidence that 3D printing shifted production closer to consumers and displaced trade. One reason is that hearing aids are light products which makes them relatively cheap to transport internationally -we come back to this point below. A second reason is because printing hearing aids in high volumes requires a large investment in technology and machinery and the presence of highly specialized inputs and services. The countries that were early innovators, Denmark, Switzerland and Singapore, remain the main export platforms. Some middle-income economies such as China, Mexico and Vietnam have also been able to substantially increase their market shares between 1995 and 2015. As a result, exports did not become more concentrated in the top producing countries following the introduction of 3D printing.
Data from the US market shows the effect of 3D printing of hearing aids on prices, quality--and thus expanded use (citations and footnotes omitted):
The new technology fundamentally changed the industry because it produced a better product at a lower cost. The change is visible in US import price data and hearing aid usage. The United States is the number one importer of hearing aids and has relatively accurate data on unit prices. ... [T]he unit value of hearing aids imported into the United States dropped by around 25 percent after 2007, right around when the technology was adopted. Hearing aid usage also increased dramatically. From 2001 to 2008 only about 26 percent of the population above 70 with hearing loss used hearing aids, and the share was flat over the period. From 2008 to 2013 (last year of data), the share increased to 32 percent. Despite the potential benefits from the use of hearing aids, stigma, discomfort and cost had been among the most frequent reasons for rejecting the use of hearing instruments
What about other industries where 3D printing is important? In preliminary work looking across 35 different industries, Freund, Mulabdic, and Ruta find the same general pattern: that is, 3D printing leads to lower prices and thus benefits for consumers, including consumers in developing countries, but no particular shift in trade patterns. They write:
One example comes from dentistry, where custom products are in high demand but are being manufactured and exported by high-tech firms. Consider Renishaw, a British engineering company, that makes dental crowns and bridges from digital scans of patients’ teeth. The printers run for 8-10 hours to make custom teeth from cobalt-chrome alloy powder, which are then exported. Dentists are not installing the machines to print teeth locally, rather the parts are shipped to dental labs in Europe, where a layer of porcelain is added before the teeth are shipped to dentists. With 3D printing, the production process changed but the supply chain remains intact. In addition to teeth, the innovative technology is also being used for several other goods, from running shoes to prosthetic limbs.