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