A NEW BOOK BY R ICHARD BALDWIN
P R O F E S S O R O F I N T E R N AT I O N A L E C O N O M I C S
THE GRADUATE INSTITUTE I GENEVA
THE GREAT CONVERGENCEInformation technology and the New Globalization
Peterson Institute of International EconomicsWashington DC 15 November 2016
RICHARD BALDWIN - THE GREAT CONVERGENCE
Manufacturing & GDP shares shifted from G7 to a few developing countries
1820
1900
1993
2014
20%
30%
40%
50%
60%
70%
1820
1833
1846
1859
1872
1885
1898
1911
1924
1937
1950
1963
1976
1989
2002
G7’s share of world GDP
RICHARD BALDWIN - THE GREAT CONVERGENCE
• Globalisation disruptive in G7:– Labour’s GDP-shares fell, but the reward to
knowledge rose.– Frustration & economic disenfranchisement.
• Globalisation was cohesive in emerging markets: Middle class flourished.
• Trade agreements got ‘deep’.– Hyper-globalisation
Globalisation’s impact changedAsymmetries & “Hyper-globalisation”
RICHARD BALDWIN - THE GREAT CONVERGENCE
What if globalisation was about knowledgeinstead of trade?
RICHARD BALDWIN - THE GREAT CONVERGENCE
• Suppose everything is made from knowhow & labour.
• Suppose trade costs & trade barriers unchanged since 1990.
• Suppose in 1990 “pipelines” opened that allowed knowhow to flow across borders.
Be extreme to be extremely clear
RICHARD BALDWIN - THE GREAT CONVERGENCE
Assume this pipeline pattern
RICHARD BALDWIN - THE GREAT CONVERGENCE
• Headquarter Economies (G7)
High & High wages
• Factory Economies
Low & Low wages
Review 1990 situation for knowhowto predict direction of flows inside pipeline
Knowhow
Labour
Knowhow
Labour
RICHARD BALDWIN - THE GREAT CONVERGENCE
• Headquarter Economies (G7)
High & High wages
• Factory Economies
Low & Low wages
When pipelines openknowhow flows massively to Factory Economies
Knowhow
Labour
Knowhow
Labour
RICHARD BALDWIN - THE GREAT CONVERGENCE
• Factory Economies industrialise; HQ Economies deindustrialise.
• Factory-Economy growth takes off. → Great Convergence.
• Factory Economies embrace policies that fosterknowledge flows; HQ Economies embrace policies that protect knowledge flows.
→ Hyper-globalisation & Globalisation Paradox
What are the international impacts?
RICHARD BALDWIN - THE GREAT CONVERGENCE
• In HQ Economies:– Labour GDP share falls; – Knowledge-owners’ shares of GDP rise.
• Globalisation is disruptive.
• In Factory Economies:– Middle class rises, 100s of million rise out of
poverty.• Globalisation is cohesive.
What are the domestic impacts?
RICHARD BALDWIN - THE GREAT CONVERGENCE
Asymmetric anti-globalisationBranko’s Elephant Chart
• G7 knowhow moved to Factory Economy workers & thus undermined incomes of G7 workers.
• Rich knowledge owners prospered.
• Other developing-nations puzzled: – Why aren’t we growing like
China?
0
20
40
60
80
100
0 10 20 30 40 50 60 70 80 90 100
Income rise from 1988 to 2008 (%)
1988 position in global income distribution (percentile)
Lower-middle class in G7
Rich in G7
Middle-class in China & other rapid
industrialisers
RICHARD BALDWIN - THE GREAT CONVERGENCE
How do we put knowledge flows back in the box?
RICHARD BALDWIN - THE GREAT CONVERGENCE
Broader perspective on globalisation3 costs that form 3 constraints on globalisation
RICHARD BALDWIN - THE GREAT CONVERGENCE
Around 1820, trade costs fall:Lower trade costs drive “unbundling” of production & consumption (i.e. Old Globalisation starts)
RICHARD BALDWIN - THE GREAT CONVERGENCE
Production clusters locally as markets expand globally This micro-clustering sparks innovation
RICHARD BALDWIN - THE GREAT CONVERGENCE
G7 innovations stay in G7 due to high communication costsResult is “Great Divergence” (1820-1990)
1820
1900
1993
2014
20%
30%
40%
50%
60%
70%
1820
1831
1842
1853
1864
1875
1886
1897
1908
1919
1930
1941
1952
1963
1974
1985
1996
2007
RICHARD BALDWIN - THE GREAT CONVERGENCE
Around 1990, communication costs fallICT Revolution + wage gap drive unbundling of G7 factories (i.e. New Globalisation starts)
RICHARD BALDWIN - THE GREAT CONVERGENCE
Offshoring of factories leads to ‘knowledge offshoring’i.e. Global Value Chains (GVCs) are the pipelines
To ensure offshored production meshes seamlessly, G7 firms offshore knowhow along with the jobs
RICHARD BALDWIN - THE GREAT CONVERGENCE
Knowledge offshoring → massive knowledge flowsResult: “Great Convergence” (1990 - today)
1820
1900
1993
2014
20%
30%
40%
50%
60%
70%
1820
1831
1842
1853
1864
1875
1886
1897
1908
1919
1930
1941
1952
1963
1974
1985
1996
2007
RICHARD BALDWIN - THE GREAT CONVERGENCE
Recap: What put the ‘new’ in the New Globalisation?
ICT enabled G7 firms to precisely control what
goes on inside developing-nation
factories
RICHARD BALDWIN - THE GREAT CONVERGENCE
How not to address anti-globalisation
RICHARD BALDWIN - THE GREAT CONVERGENCE
Premise #1) ICT broke the monopoly that G7 labour had on G7 knowhowThis can’t be undone with tariffs
RICHARD BALDWIN - THE GREAT CONVERGENCE
Premise #2) Globalisation operates with a finer resolutionThis can be partly undone with tariffs
Product
New Globalisation
Manufacturing stage
JobJob
Manufacturing stage
JobJob
Product
Old Globalisation
Manufacturing stage
JobJob
Manufacturing stage
JobJob
RICHARD BALDWIN - THE GREAT CONVERGENCE
• #1 + #2 ⇒ Globalisation’s impact is:– More sudden;– More individual;– More unpredictable;– More uncontrollable.
Premise #3) The rage is rationalAnxiety & anger generated by New Globalisation
No matter what job or skills you have, you can’t really be sure your job won’t be next.
RICHARD BALDWIN - THE GREAT CONVERGENCE
Consider: ICT Revolution + “Trump Tariff Act of 2017”20th century thinking meets a 21st century problem
?
RICHARD BALDWIN - THE GREAT CONVERGENCE
Two questions: - Will US manufacturing stages rebundle? - Will rebundling take place in US or abroad?
?
RICHARD BALDWIN - THE GREAT CONVERGENCE
Raising US trade barriers will not stop offshoring of US knowhowbut it will raise the cost of industrial inputs in US
RICHARD BALDWIN - THE GREAT CONVERGENCE
• US imported parts get dearer.– Mexico, Canada & China are major parts suppliers.
• US final goods stay competitive inside US due to tariffs on imported final goods.
• Economic logic → manufacturing shifts:– to US for US market sales; – to US foreign affiliates for non-US sales.
• Foreign retaliation exaggerates the trend.• (And Japanese & German competitors)
Trump tariffs would make US a high-cost island for manufacturing
RICHARD BALDWIN - THE GREAT CONVERGENCE
Jobs? US workers competing with robots at home & China abroad
• The offshored jobs were typically low-skill and routine, thus prone to automation.
• Economic logic → lots of jobs for robots, few jobs for US workers.
RICHARD BALDWIN - THE GREAT CONVERGENCE
1. Accept 21st century realities: • New Globalisation isn’t something that foreigners are
doing to us.– US competitiveness depends on “Factory North America”
since New Globalisation de-nationalised comparative advantage.
• You can’t vote against globalisation by voting against the agreements that shape & control it.– Old Globalisation tools that control trade flows don’t work on
New Globalisation knowledge flows.
What way forward?
RICHARD BALDWIN - THE GREAT CONVERGENCE
2. Rebuild the team:– Restore social cohesion with policies that protect
individual workers, not individual jobs.• Retraining, education, mobility support, income support,
maybe even active ‘clusters policy’.
3. Package it politically:– “Trade policy in the service of society.”
• When proposing more open trade & GVC policy, also propose policies that help economically disenfranchised.
What way forward (continued)
Thanks for listening