Misthinking Globalisation Richard Baldwin Graduate Institute, Geneva & University of Oxford
Conventional view of globalisation No trade to free trade, slowly.
1870 1990: Globalisation Trade costs 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.Falling transport costs 1913 2.Rising tariffs 1.9 Averge trade cost Global trade flow (right scale) 1950 1921 1938 3.Falling tariffs & transport costs 1990 15 15 14 14 13 13 12 12 11 11 10 Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).
Globalisation changed around 1990
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 10 developing nations. RoW see little change. 1990 China, Brazil, Mexico, Poland, India, Turkey, Russia, Korea, Indonesia, Venezuela
Source of Value Added Export growth, 1995 2008
People in poverty (under $2/day) Millions under $2/day by national income class 1,600 1,400 1,200 1,000 800 600 400 200 - Lomiddle Hi- Middle Low 1993 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 Post 1993 Hi middle poverty plummets. 650 million fewer poor! Others poverty keeps rising. 1990
Global manufacturing shares, 1970 2010 World manufacturing share World manufacturing share 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1990, G7 G7 65% RoW 6 6 risers, 5% 5% 3% China, 3% 1970 1970 1975 1975 1980 1980 1985 1985 1990 1990 1995 1995 2000 2000 2005 2005 2010 2010 47% China, 18% 9% Source: unstats.un.org; 6 risers 6 risers = Korea, = Korea, India, India, Indonesia, Thailand, Turkey, Poland Poland 7 losers. 7 risers. RoW = little change.
Nature of trade changed: Intra industry trade (IIT) Intraindustry trade indices 80% 70% 60% 50% 40% 30% 20% 10% Germany -France US- Mexico Germany- Poland US- Mexico Japan- Thailand 0% 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 1990
Trade & investment policies Protectionism becomes destructionism 250 200 150 100 50 0 BITs signed per year (right scale) 1988 World FDI ($ billion) 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2500 2000 1500 1000 500 0 50 45 40 35 30 25 20 15 10 5 0 Applied tariffs (%) Middle East & North Africa East Asia Sub- Saharan Africa South Asia 1990 1995 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 US, Japan & EU
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
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.
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
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
A new narrative for globalisation Globalisation as 2 processes, not 1
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
Distance still matters Regionalization of supply chains Hypothesis: people still expensive to move. Face 2 face and Face 2 machine constraints.
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.
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.
1 st unbundling: euros D S S S euros euros D N P T XS S N P -T MD Quantities World trade Quantities
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
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
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 = 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.
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.
Misthinking industrialisation: Spence growth commission (2008) Economy Period of +7% growth GDP/pop at start GDP/pop in 2005 Botswana 1960 2005 210 3,800 Brazil 1950 1980 960 4,000 China 1961 2005 105 1,400 Hong Kong, China* 1960 1997 3,100 29,900 Indonesia 1966 1997 200 900 Japan* 1950 1983 3,500 39,600 Korea, Rep. of* 1960 2001 1,100 13,200 Malaysia 1967 1997 790 4,400 Malta* 1963 1994 1,100 9,600 Oman 1960 1999 950 9,000 Singapore* 1967 2002 2,200 25,400 Taiwan, China* 1965 2002 1,500 16,400 Thailand 1960 1997 330 2,400
Misthinking globalisation: Fancy Revealed Comparative Advantage, Hausmann & Rodrik
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.
Some applications
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.
Little correlation REI vs Growth in Domestic VA in exports 2500% 2000% 1500% 1000%? 500% 0% -200% -100% 0% 100% 200% 300% -500%?
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
Relationship by nation & sector EA EMs G5 Oth EM SCTers
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%
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
-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 1995-2005
Smile started in the 1990s 30% 20% China 30% 20% Korea 30% 20% Indonesia VA share change 10% 0% -10% 1985-1995 VA share change 10% 0% 10% 1985 1995 VA share change 10% 0% 10% 1985 1995-20% -30% 1995-2005 20% 30% 1995 2005 20% 30% 1995 2005 30% 20% Malaysia 30% 20% Taiwan 30% 20% Thailand VA share change 10% 0% 10% 1985 1995 VA share change 10% 0% 10% 1985 1995 VA share change 10% 0% 10% 1985 1995 20% 30% 1995 2005 20% 30% 1995 2005 20% 30% 1995 2005
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Extra slides for Q&A
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%
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
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
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
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.
1 st unbundling: euros D S S S euros euros D N P T XS S N P -T MD Quantities World trade Quantities
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
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
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