Opinion – Martin Wolf: Globalization is not dying, it is changing

What is the future of globalization? This is one of the biggest questions of our time. In June, I argued that, contrary to increasingly widespread opinion, “globalization is not dead. It may not even be dying. But it is changing.” Among the most important forms of change is the growth of services provided at a distance.

Since the industrial revolution, we have seen, as Richard Baldwin argues in his book The Great Convergence, three waves of opportunity for trade.

First, industrialization and the transport revolution created opportunities for trade in goods. More recently, new information technologies have enabled “factory trading”: it has become profitable to move entire factories to where labor is cheap.

Today, however, broadband internet allows for “office trading”: if someone can work for their employer from home, so can someone in India.

Furthermore, an important difference between the first and second waves, which require the displacement of objects, and the third, which move information virtually, is that it is much easier to impose obstacles to physical commerce than to virtual commerce. It is not impossible to impose the latter, as China shows. But it takes a lot of effort.

As Baldwin has argued in four recent blogs, this analytical framework allows us to see the future of commerce in a different light than the current one. In particular, what he calls a “lazy” view of the history of globalization and trade is misleading on several counts. What is this vision? It’s just that, after about two decades of very rapid growth, world trade in goods peaked in 2008, under the deathblow of the financial crisis, when the world turned away from trade.

This view of what happened and why is misleading.

First, the trade share of the world’s second largest goods trader, China, peaked before 2008 (in 2006). Those of the third and fourth largest goods traders, the United States and Japan, peaked after 2008 (in 2011 and 2014). The proportion of the biggest trader, the European Union, has not peaked, although it has stagnated.

Second, the biggest drop in the proportion of trade is in China. But this does not reflect protectionism abroad or a deliberate departure from trade by China itself. The country has only normalized the dependence on trade in relation to its economic size.

Third, in monetary terms, the biggest cause of the decline in the proportion of trade was the fall in the price of commodities, not a reduction in the volume of trade. This price drop accounted for 5.7 percentage points of the 9.1-point drop in the ratio of trade in goods to world output between 2008 and 2020.

Finally, there is indeed evidence of a dismantling of cross-border supply chains, but the turning point appears to be in 2013, after the financial crisis but before the election of Donald Trump. The main explanation is the changing supply chains within the new suppliers, especially China, the predominant one. Instead of assembling imported intermediaries, China now produces them itself.

All in all, there are perfectly natural explanations for the fall in the ratio of world trade in goods to output. But the slowdown in supply chain disaggregation is real. Among other explanations, many of these chains have now shifted within China.

Services are a different story. The ratio of trade in services to world production, although much smaller than that of goods, continued to increase. Services are a very heterogeneous set of activities, some of which require the movement of people (tourism, for example). But activities in the exceptionally dynamic category of “other commercial services” (OCS) can largely be provided virtually. These include a very diverse range of activities. The growth of OCS trade is also exceptionally dynamic: between 1990 and 2020, merchandise trade has quintupled while OCS trade has multiplied 11 times.

A crucial point is that the expansion of trade in these services depended little on trade agreements. Regulation of service activities focuses on final services, not intermediaries. There are, for example, strict rules on the sale of accounting services in the United States. However, there are few rules about the qualification of workers who do the paperwork behind providing these services.

Thus, an “American accountant can employ virtually anyone to account for a client’s travel expenses and compare them to expense receipts.” Examples of occupations that provide intermediate as opposed to final services include bookkeepers, forensic accountants, resume reviewers, administrative assistants, online help staff, graphic designers, copy editors, personal assistants, X-ray readers, security consultants. IT professionals, software engineers, lawyers who verify contracts, financial analysts who write reports. The list goes on.

As Baldwin argues in The Globotics Upheaval, the potential of this kind of technology-enabled commerce is enormous. It will also be highly disturbing: the white-collar workers who provide these services in high-income countries are an important part of the middle class. But it will be difficult to protect them.

Altogether, the evidence suggests that natural economic forces were largely responsible for changes in the pattern of world trade. Growing concern about the security of supply chains will no doubt add to these changes, although it is doubtful whether the result will be “reshoring” [o retorno da terceirização aos países de origem] or “friendshoring” [terceirização para amigos]. Most likely a complex pattern of diversification. Meanwhile, technology is opening up new areas of growth in services.

Needless to say, disasters can change this picture: Covid was disruptive; so does the current energy crisis; and the war or the threat of it would disturb even more. Healthy global trade is a sign of peace, even if it cannot bring about it. No one in their right mind would want the dark alternatives.

Translated by Luiz Roberto M. Gonçalves