International Policy Digest: Chaos and Globalization

Globalization does not proceed in an orderly way. Instead, the pattern for globalization with trade and wars is often two steps forward, one step back. Daniel Alonso, writing for International Policy Digest, compares globalization of the late 19th century with modern forms in place since 1980. Trade and commerce developed during the 19th century, enriching many before coming to an abrupt halt with the start of World War I. Modern globalization comes in many forms: Some trade is enmeshed within the same sector and other trade is more competitive. Reduced shipping costs allows value-added trade to be quickly divided and sent to locales with the least expensive wages and costs. Countries also fall into patterns: Super-trading economies are countries with low populations with company headquarters based in wealthy nation and production and sales spread around the world, or countries with low skilled wages manufacture and export products. Rapid migration and the global reach of the internet are new factors. Alonso concludes, the world has not learned from history about the dangers of tariffs, nationalism and war. Undvrstanding globlization is key to shaping its trends. – YaleGlobal

International Policy Digest: Chaos and Globalization

Globalization progresses in an uneven ways, and modern forms are influenced by trade including value chains, low wages, exports, migration and the internet
Daniel Alonso
Wednesday, November 14, 2018

International Policy Digest: Globalization is often thought of within a linear perspective of history, and that makes us think that everything in the past was worse than what we have now. This might be a misleading perspective because there was another successful globalization process before WWI. Having that perspective might help us as we look forward.

The second half of the 19th century was a successful era for trade and commerce, during which trade was understood (especially for Britain) as an important source of welfare and development. Sadly, this part of history is rarely discussed today when we talk about globalization. Great economists from the periods after the two wars were inspired by this last globalization. Also, there were many organizations that were created in an attempt to rebuild and improve on globalization (Bretton Woods, the World Bank, the International Monetary Fund and so on). This is a quote from the great economist John Keynes about globalization before 1914:

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages.

After the war, all those systems and connections disappeared. Between 1914 and the early post-WWII years, most of the world’s economies turned inward. Therefore, much of the increase in world trade after the wars represented only a recovery to previous levels. Until 1970, world trade in terms of GDP did not catch up with the highest levels during the previous globalization. This new globalization had different characteristics.

First, those new characteristics of trade are exposed in the Krugman 1995 paper.

The rise of intra-trade refers to trade between countries with products of the same sector. A high proportion of the trade among industrial countries is now between different production processes within the same company. Shipping cotton from British colonies to sell in Britain does not create the same trade net as dividing the production of cars or mobile phones among three or four countries.

Slicing up the value-added chain. The goods that are been shipped now are much more complex than they were before and the continuous decrease in shipping costs make it increasingly easy to slice up the production chain and constantly move it to the cheapest and most efficient place.

The appearance of super-trading economies. These are really low population and low GDP countries with extremely high ratios of trade-to-GDP. This is possible because of the slicing up of the value chain and the increasing importance in the value of software/internet/financial related services. The headquarters of the company is located in first world countries like Belgium or Hong Kong, but the production and the consumption of their products are dispersed around the globe. As an example, we can think of Apple, one of the most valuable companies in the world, which has its headquarters in the Silicon Valley. The only thing that is produced there are the ideas. Everything else is done elsewhere: the case for the phone might be fabricated in China or Thailand, the chips in Japan, the screen might be produced by Samsung in South Korea, and so on.

In my opinion, the value that will be created by First-World countries in the future if they want to continue being first world countries is not going to be located in the physical world, but in the technology and software.

Low wage manufacturing exporters. The rapid growth of manufactured exports from low wage, newly industrialized economies like China have shown a speed in development and change that the world has never seen before, with an unstoppable shift in the balance of the world. Large populations are concentrated in huge cities under a technocratic dictatorship which fits perfectly with the needs and speed with which the economy is shifting money to that part of the world.

Two other factors also impact globalization.

Migration. The globalization that occurred before 1914 was based not only on the free movement of capital, but also on the free movement of people. That is not happening now. Globalization was welcomed, whereas now it seems more like an inevitable result of capitalism that we must deal with. There is no willingness to adapt to a world that is constantly changing and that has always been changing. Migration rates were remarkable: Argentina added 30% to its population in immigrants alone, from-1910.

World Wide Web. The internet has already revolutionized the world and will continue to do so. We are going to be covering trade and globalization in terms of causes and consequences not theory and mathematics. The changes that this new technology bring might not be as obvious as previous technological revolutions because the ways in which the internet is changing the world is much more powerful.

What worries me the most regarding globalizations is that we have experienced the damage caused by tariffs, nationalism and war. For some reason the same patterns again appear. We are supposed to have learned from past generations, but it seems we have not.

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