Misthinking Globalisation

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Owen Summers
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1 Misthinking Globalisation Richard Baldwin Graduate Institute, Geneva & University of Oxford

2 Conventional view of globalisation No trade to free trade, slowly.

3 : Globalisation Trade costs Falling transport costs Rising tariffs 1.9 Averge trade cost Global trade flow (right scale) Falling tariffs & transport costs Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).

4 Globalisation changed around 1990

5 What changed globalisation? Follow the clues

Global GDP shares, 1960 2012 80% 70% 60% 50% 40% 30% 20% 10% 0% RoW 67% 11% G7, 48% 10 gainers 27% Post 1990: G7 share loss goes to

6 Global GDP shares, % 70% 60% 50% 40% 30% 20% 10% 0% RoW 67% 11% G7, 48% 10 gainers 27% Post 1990: G7 share loss goes to 10 developing nations. RoW see little change China, Brazil, Mexico, Poland, India, Turkey, Russia, Korea, Indonesia, Venezuela

7 Source of Value Added Export growth,

8 People in poverty (under $2/day) Millions under $2/day by national income class 1,600 1,400 1,200 1, Lomiddle Hi- Middle Low Post 1993 Hi middle poverty plummets. 650 million fewer poor! Others poverty keeps rising. 1990

9 Global manufacturing shares, World manufacturing share World manufacturing share 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1990, G7 G7 65% RoW 6 6 risers, 5% 5% 3% China, 3% % China, 18% 9% Source: unstats.un.org; 6 risers 6 risers = Korea, = Korea, India, India, Indonesia, Thailand, Turkey, Poland Poland 7 losers. 7 risers. RoW = little change.

10 Nature of trade changed: Intra industry trade (IIT) Intraindustry trade indices 80% 70% 60% 50% 40% 30% 20% 10% Germany -France US- Mexico Germany- Poland US- Mexico Japan- Thailand 0%

11 Trade & investment policies Protectionism becomes destructionism BITs signed per year (right scale) 1988 World FDI ($ billion) Applied tariffs (%) Middle East & North Africa East Asia Sub- Saharan Africa South Asia US, Japan & EU

12 Smile curve : Distribution of value Share of value added Post-1990 value distribution 1970s & 1980s value distribution Pre-fab services Fabrication Post-fab services Stage

13 Clue #1: The change is: Clues Historic in size, Global in reach, VERY unevenly spread geographically. Clue #2: The change is: Related to manufacturing & trade in intermediates. Clue #3: Transformed developing nations views of trade & investment.

14 Buzzwords in lieu of analysis It s hyperglobalisation It s FDI It s FDI It s the East Asian miracle It s capital flows It s vertical specialisation It s Emerging Markets

15 Elephant = international movement of firm specific know how. It s FDI It s FDI It s hyperglobalisation GVC revolution Know how becomes: 1) Firm specific, not nation specific. It s the East 2) Rapidly combined with Asian South labour but only in miracle a few developing nations. It s capital flows It s vertical specialisation It s Emerging Markets

16 A new narrative for globalisation Globalisation as 2 processes, not 1

17 Globalisation: 3 cascading constraints High High High = Preglobalised world Steam revolution Low High High = 1 st unbundling Stage A Stage C Stage B ICT revolution Low Low High = 2 nd unbundling Stage A Stage B Stage C

18 Distance still matters Regionalization of supply chains Hypothesis: people still expensive to move. Face 2 face and Face 2 machine constraints.

19 Basic economic difference 1 st unbundling: old paradigm globalisation (A) National comparative advantage. (B) Trade: Goods crossing borders. 2 nd unbundling: new paradigm globalisation (A) Denationalized comparative advantage. (B) Trade: Factories crossing borders. Richer, interconnected flows: goods, knowhow, ideas, capital, people, etc.

20 Economics of 2 nd unbundling 2 ways of recombination hi tech & low wages: Direct: North know how moves to South labour (offshoring). Indirect: North know how moves to South in components. (trade in parts & components). NB: Comparative advantage becomes a multicountry concept.

21 1 st unbundling: euros D S S S euros euros D N P T XS S N P -T MD Quantities World trade Quantities

22 1 st unbundling: Trade costs fall North industrialises; South de industrialises euros D S S S euros euros D N P T XS N produces & exports more S N P FT P FT S produces less & imports more MD P -T Quantities World trade Quantities

23 2 nd UB Direct recombination of North tech with South labour euros D S S S euros euros D N XS S N P FT P 2UB S exports S S MD MD Quantities World trade Quantities XS N exports P FT P 2UB

24 Trade in parts can switch comparative advantage euros South euros D Z South S Z D Y S Y P W Z S Z P Y MC Z P P Y Q Y Q Y Quantity, parts Q Y =Q Z M Z X Z Quantity, final goods

25 Misthinking globalisation = misthinking economics/econometrics 1 st unbundling thinking: Y A F[ L, K ] Jpn Jpn Jpn Jpn 2 nd unbundling thinking: Globalisation changes technology in some developing nations. Know how flows directly in global value chains & indirectly via intermediates.

26 Why it matters OLD: Study national performance looking at national factors. Team Japan versus Team Germany Regress growth/exports/etc on national right hand side variables. NEW: Study national performance looking at regional and national factors. Factory Asia versus Factory North America Regress growth/exports/etc on national & regional right hand side variables and/or allow interactions depending upon supply chain exposure.

27 Misthinking industrialisation: Spence growth commission (2008) Economy Period of +7% growth GDP/pop at start GDP/pop in 2005 Botswana ,800 Brazil ,000 China ,400 Hong Kong, China* ,100 29,900 Indonesia Japan* ,500 39,600 Korea, Rep. of* ,100 13,200 Malaysia ,400 Malta* ,100 9,600 Oman ,000 Singapore* ,200 25,400 Taiwan, China* ,500 16,400 Thailand ,400

28 Misthinking globalisation: Fancy Revealed Comparative Advantage, Hausmann & Rodrik

29 Key difference for policy 1 st unbundling = 1UB Slow, predictable, controllable (tariff cuts). Impact by sector and skill group. 2 nd unbundling = 2UB Sudden, individual, unpredictable. Globalisation with a finer degree of resolution.

30 Some applications

31 First look at relationship Hope Faster domestic valueadded export growth correlated with faster REI growth. Plot vertical axis = Growth in domestic value added in exports Plot horizontal axis = Growth in REI trade (supplychain participation) Data Plot all nations, all 18 goods sectors. Growth from 1995 to 2009.

32 Little correlation REI vs Growth in Domestic VA in exports 2500% 2000% 1500% 1000%? 500% 0% -200% -100% 0% 100% 200% 300% -500%?

33 But theory to rescue The correlation should depend upon: Nations: Headquarter v factory economies Primary resource exporters v manufactures exporters Sectors: GVC sectors (mech & elec machinery, chemicals, etc) nongvc sectors

34 Relationship by nation & sector EA EMs G5 Oth EM SCTers

35 Relationship by nation & sector 34T35: Transport equipment 29: Machinery and equipment, nec 2300% 2300% 1800% VNM PHL 1800% 1300% 800% 300% MYS TWN IDN KOR THA CHN -200% -100% 0% 100% 200% 300% EA EMs G5 Oth EM SCTers 1300% 800% 300% VNM IDN PHL THA KOR MYS TWN CHN -200% -100% 0% 100% 200% 300% 2300% 30T33: Electrical and optical equipment EA EMs 1800% G5 1300% VNM CHN Oth EM SCTers 800% IDN PHL 300% TWN MYSTHAKOR -200% -100% 0% 100% 200% 300%

36 Firm v Economy Smile Curve Stage s share product value added Firm level smile curve 21 st century value chain Input-sector s share of export value added Economy wide smile curve 1970s value chain Pre-fab services Fabrication Post-fab services Stage Primary Manufacturing Services Origin sector

37 -25% -15% -5% 5% 15% 25% Japan -25% -15% -5% 5% 15% 25% Korea -25% -15% -5% 5% 15% 25% Taiwan -5% -10% 16% -25% -15% -5% 5% 15% 25% Thailand -7% -12% 19% -25% -15% -5% 5% 15% 25% China -10% -2% 12% -25% -15% -5% 5% 15% 25% Philippines -5% -5% 10% -25% -15% -5% 5% 15% 25% Indonesia -1% -22% 22% -25% -15% -5% 5% 15% 25% Malaysia

38 Smile started in the 1990s 30% 20% China 30% 20% Korea 30% 20% Indonesia VA share change 10% 0% -10% VA share change 10% 0% 10% VA share change 10% 0% 10% % -30% % 30% % 30% % 20% Malaysia 30% 20% Taiwan 30% 20% Thailand VA share change 10% 0% 10% VA share change 10% 0% 10% VA share change 10% 0% 10% % 30% % 30% % 30%

39 END Thank you for listening. Unpaid avert: please visit: Research based policy analysis and commentary by leading economists

40 Extra slides for Q&A

41 Supply chain trade by industry All services Food & related Manufacturing, Leather & Machinery, nec Transport equip Textiles & related Elect & Opt'l equip Ag & related Fuels Chemicals & Paper & related Rubber & Plastics Wood & related Basic metals & Mining Non-metallic World final share, '09 World final share, '95 0% 20% 40% 60% 80% All services Food & related Manufacturing, Leather & Machinery, nec Transport equip Textiles & related Elect & Opt'l equip Ag & related Fuels Chemicals & Paper & related Rubber & Plastics Wood & related Basic metals & Mining Non-metallic Total world export shares '09 0% 10% 20% 30%

42 I2P trade: Bilateral intermediate imports as % of global flows, 2009 UK Germany France Itlay NL Belgium Austria Poland Czech Denmark Spain Portugal Finland Greece Ireland Turkey Sweden Brazil Russia India Indonesia Australia Taipei China Japan Korea US Mexico Canada RoW I2P '09 UK 0% 0% 0% 0% 1% Germany 0% 1% 0% 0% 0% 1% 0% 2% France 0% 1% Itlay Factory 1% NL 1% 0% 0% Belgium 0% Europe Austria Poland Czech Denmark 0% Spain 0% Portugal Finland Greece Ireland 0% Turkey 0% Sweden Factory 0% Brazil 0% Russia Asia 1% India 0% Indonesia 0% Australia 1% 0% Taipei 1% 0% China 1% 0% 1% 1% 2% 4% Japan 1% 0% 0% 2% Korea 1% 1% US 0% 0% 0% 1% 0% 1% 1% 4% Mexico 1% Canada 2% RoW 1% 1% 1% 1% 1% 0% 0% 0% 1% 0% 0% 0% 4% 2% 1% 3% Facto NorA

43 2 nd unbundling: Industrialisation easier, but less meaningful 2UB: External economies with GVC wage SVMPL M (ISI) M Social Value Marginal Product of Labour in Manufacturing A U U VMPL A L M L M L L M 43

44 1UB w/w* e EU exports Postwar tariff liberalisation z x Nontraded Non traded Job creation Job destruction z m Globalisation s impact is: 1. Slow & controlled. Mainly tariff liberalisation 2. Predictable. Sunset sectors like those already lost. Sunrise Foreign goods sectors in Home like those already exporting. A(z) 3. Globalisation s impact felt at level of sectors & skill groups. Home goods in Foreign EU imports z, sectors

45 Economics of 2 nd unbundling 2 ways of recombination hi tech & low wages: Direct: North know how moves to South labour (offshoring). Indirect: North know how moves to South in components. (trade in parts & components). NB: Comparative advantage becomes a multicountry concept.

46 1 st unbundling: euros D S S S euros euros D N P T XS S N P -T MD Quantities World trade Quantities

47 1 st unbundling: Trade costs fall North industrialises; South de industrialises euros D S S S euros euros D N P T XS N produces & exports more S N P FT P FT S produces less & imports more MD P -T Quantities World trade Quantities

48 2 nd UB Direct recombination of North tech with South labour euros D S S S euros euros D N XS S N P FT P 2UB S exports S S MD MD Quantities World trade Quantities XS N exports P FT P 2UB

49 Trade in parts can switch comparative advantage euros South euros D Z South S Z D Y S Y P W Z S Z P Y MC Z P P Y Q Y Q Y Quantity, parts Q Y =Q Z M Z X Z Quantity, final goods

Misthinking Globalisation. Richard Baldwin Graduate Institute, Geneva & University of Oxford

Misthinking Globalisation. Richard Baldwin Graduate Institute, Geneva & University of Oxford Misthinking Globalisation Richard Baldwin Graduate Institute, Geneva & University of Oxford Conventional view of globalisation Autarky to free trade, slowly. Several waves, but single process. 1870 1990: