Healthy global trade is a sign of peace, even if it cannot bring it. No one in their right mind would want the bleak alternatives.
By Martin Wolf
What is the future of globalization? This is one of the biggest questions of our time. In June, I argued, contrary to the increasingly widespread opinion, that globalization is not dead, and that it is changing.
And one of the most important ways it is changing is through the growth of services delivered remotely. Since the industrial revolution, Richard Baldwin says in his book "The Great Convergence," we have experienced three waves of opportunities to do business.
First, industrialization and the revolution in transportation created opportunities for the trade of goods.
Recently, new information technologies have allowed for “factory trading”: it became profitable to move factories to where labor was cheaper.
Today, however, broadband internet allows for “commuting”: if someone can work for their employer from home, so can someone living in India.
Furthermore, an important difference between the first and second waves, which require the movement of objects, and the third, which moves information virtually, is that barriers to physical trade are much easier to impose than those to virtual trade.
As China shows, it is not impossible to impose the latter. But it requires great effort. As Baldwin argues in one of his recent blog posts, this analytical framework allows us to see the future of trade in a different light than the one that is currently in vogue.
In particular, what he calls the “lazy” view of the history of globalization and trade is false on a number of dimensions. So what is the real picture? It is often claimed that after about two decades of very rapid growth, world trade in goods peaked in 2, precisely at the time of the deadly blow of the financial crisis, after which the world began to distance itself from trade.
This view of both what happened and why is misleading. First, the trade volume of the world’s second-largest merchandise trading country, China, actually peaked before 2008 (in 2006). The third and fourth-largest countries, the US and Japan, peaked after 2008 (in 2011 and 2014). Meanwhile, the EU, which has the world’s largest trade volume, has not yet peaked.
Second, the largest decline in trade volume belongs to China. But this does not reflect any protectionism towards the outside world, or any deliberate move away from trade on the part of China itself. China has simply normalized its dependence on trade, relative to its economic size.
Third, in monetary terms, the main cause of the decline in trade volume was the fall in the price of goods, not the decline in trade volume. Finally, there is indeed evidence of a breakdown in cross-border supply chains. But the turning point seems to have occurred in 2013, after the financial crisis but before the election of Donald Trump as president.
A key explanation is the shift of supply chains to new suppliers, especially towards China. In general, there are perfectly natural explanations for the decline in the volume of world trade in goods relative to GDP. But the slowdown in supply chain fragmentation is real.
Services are a different story. The ratio of services trade to world output, although much lower than that of goods, has continued to grow. Services are a very heterogeneous group of activities, some of which require the movement of people (for example, tourism).
But activities in the highly dynamic category of “other commercial services” can be provided largely virtually. A crucial element is that the expansion of trade in such services is little dependent on trade agreements. The regulation of service activities focuses on final services, not intermediate ones.
For example, in the US there are strict rules for selling accounting services. But on the flip side, there are few rules about the qualifications of the workers who do the paperwork behind providing such services. Thus, an “American accountant can hire almost anyone to calculate a client’s travel expenses, and to list them with expense receipts.”
Examples of professions that provide intermediate services, as opposed to final services, include accountants, forensic accountants, resume reviewers, administrative assistants, web support staff, graphic designers, copy editors, personal assistants, IT security consultants, IT support staff, software engineers, lawyers who review contracts, financial analysts who write reports, etc. The list goes on.
As Baldwin argues in “The Globotics Upheaval,” the potential for this kind of technology-enabled commerce is enormous. But it will also be highly disruptive: the white-collar workers who provide these services in high-income countries are a significant part of the middle class.
But protecting them will be difficult. Overall, the evidence suggests that natural economic forces have been largely responsible for past changes in the pattern of world trade. There is no doubt that growing concern about the security of supply chains will add to these changes, although it is doubtful what the outcome will be.
More likely, it is a complex pattern of diversification. Meanwhile, technology is opening up new areas of service growth. Needless to say, disasters can change the landscape: the Covid-19 pandemic was devastating.
Likewise, the current energy crisis and the threat of war would disrupt even more jobs. Healthy global trade is a sign of peace, even if it cannot bring it. No one in their right mind would want the bleak alternatives. / “Financial Times” – Bota.al
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