Richard Baldwin on the New Globalization

To really understand how this changed the nature of globalization, consider a sports analogy. Suppose we have two football teams, one that needs a quarterback but has too many linebackers, and one that needs a linebacker but has too many quarterbacks. If they sit down and trade players, both teams win. It’s arbitrage in players. Each team gets rid of players they need less of and gets players they need more of. That’s the old globalization: exchange of goods.

Now let’s take a different kind of exchange, where the coach of the better team goes to the field of the worse team and starts training those players in the off-season. This is very good for the coach because he gets to sell his knowledge in two places. You can be sure that the quality of the league will rise, all the games will get more competitive, and the team that’s being trained up will enjoy the whole thing. But it’s not at all certain that the players of the better team will benefit from this exchange because the source of their advantage is now being traded.

In this analogy, the better team is, of course, the G7, and not surprisingly this has led to some resentment of globalization in those countries. The new globalization breaks the monopoly that G7 labor had on G7 know-how…

That’s Richard Baldwin on the new globalization. His book, The Great Convergence is very good.

Comments

Starting around 1990, the G7’s share of world GDP fell to under 50 percent in two decades, back to the level it was at in the 1900s.

But it grew in absolute terms. Advances by others don't necessarily mean regression for the G7. Why do you want brown people to be poor?

Exactly. It was never sustainable or desirable for 10-20% of the world’s population to make two-thirds of the income. The ideal pattern of economic growth is where everyone gets richer but poor people get richer faster, thus reducing rich peoples’ relative income share. That is more or less what is happening with today’s globalization, which makes it if anything more desirable than Industrial Age globalization, which only benefitted a few countries and left the rest of the world exposed to those countries’ imperialism.

Why do you only care about brown people? There are billions of non-browns in outwith the G7.

Why do you only care about brown people? There are billions of non-browns outwith the G7.

As a Republican politician in the US, it is my job to make sure that my constituents get sufficient scraps from the Oligarchs' table. If there is not enough economic growth to satisfy the Oligarchs, well it has to come from somewhere.

But what if in the football analogy it makes the price of the ticket too high and middle class people can't afford to go to the games anymore? If you get to make up the analogy and only show glowing good results are you biased?

'both teams win'

No, when they play each other, one team wins, and the other loses. Unless there is a tie, of course. It never happens that both teams win in football, however.

As for the coach example, sure, why not say that a coach that knows two team's playbooks will improve the league in general. Since that example will never occur in reality - the coach will only be working with one team at a time, if only because the owners (somehow, they weren't mentioned) aren't stupid enough to pay somebody to hurt themselves. The best team owner has no interest in the least about the worst team's prospects, and basically all owners would agree to prevent such behavior on the part of a coach.

The owners are in charge after all, not the coaches or players - and the owners do not care about the interests of such replaceable people.

It is almost always a mistake to use sports metaphors when describing economic concepts, for the reasons you state. The *point* of sports is to engage in a zero-sum exchange. The *point* of commerce is to engage in a positive-sum exchange.

True, except one or both sides has losers and maybe more losers than winners. The losers don't like it.

"No, when they play each other, one team wins, and the other loses. "

So, the ideal is when there is only one team, and the single team, which always wins because they are the only ones on the playing field, take home 100% of the gate charged all the sports fans???

Pro sports involves paying the players of many losers a high wage while capping the wages of the winning teams players in order to ensure games where competition is strong enough any team can win. Only when the winner is uncertain, and changes, do the players, coaches, stadiums maximize their total income.

Only the US seems to focus on the very competitive nations going head to head with many nations, winning and losing in equal measure, growing the incomes of all those they trade with.

China trade balance is much closer than the US because while China gets more dollars from the US (net), it pays more dollars to nations like Saudi Arabia, Australia, and Africa.

Note Trump never complains about being ripped off for decades by Saudi Arabia, Iraq, and other African petrostates. In some cases, those nations use dollars from the US and China to buy weapons from the US, but those weapons then become the tools that create justification to engage in costly wars.

I demand Trump focus on our getting ripped off by Saudi Arabia, et al, and impose a $50 tariff on each barrel of imported oil.

"I demand Trump ... impose a $50 tariff on each barrel of imported oil."

That's basically what fracking does, and Trump's a big supporter, so I'd say he's way ahead of you.

"Pro sports involves paying the players of many losers a high wage while capping the wages of the winning teams "

No, *some* pro sports in some leagues involve capping wages, there are plenty which don't.

This metaphor would be more accurate if it included the part where rents and the proceeds of crime, state-sanctioned or otherwise, are used to pay not only club salaries but also buy the clubs. This helps club-owners launder their ill-gotten cash and reputations, where they can then buy-up legitimate, moral and productive parts of the host economy - as well as local property - and enslave the host population. With the connivance of the native political elite. Any account of globalisation which doesn't talk about organised crime, is not worth reading anymore. It's 20%+ of the global economy and - I imagine - accounts for an even greater % of global financial flows.

It's 1.5% of the global economy:

https://www.unodc.org/toc/en/crimes/organized-crime.html

I looked at that link, and it doesn't seem to account for say enterprises in countries like Russia where organized crime is part of the political establishment, such that there isn't really a stark distinction between illicit and licit business, because all of the licit businesses of any size have extensive ties to both the state and the mob. Really every barrel of oil coming from Russia should be counted as proceeds of organized crime.

The analogy is a little off. What happened is that the owner of the better team replaced many of his high priced players with lower priced players from the other team, while the owner of the other team recruited more lower priced players to be trained by the coach from the better team. A win, win for the owners of the two teams, not so much for the high priced players let go by the better team but a net benefit for the additional lower priced players who would otherwise not have played. The collaboration was between, and the greatest benefit derived by, the owners of the two teams.

I favor trade and its benefits. But that's because I was an economics major 48 years ago, back when comparative advantage wasn't questioned, back when boys were boys and girls were girls (i.e., when less developed countries produced raw materials that developed countries used to make finished goods). That was also a time when Jews and blacks worked together for a common goal, when Republicans favored order and stability, when libertarians were a little eccentric but not creepy.

Of course the problem is that professional sport is zero sum and most of economic life is not.

Agreed. This is a shit analogy. Countries aren't sports teams competing for ... what, a trophy? What DO you get for winning at tournament nationhood?

Yeah - the whole analogy reeks of zero-sum. What about the audience that watches the games, the builders of the stadiums (private of course), the sponsors, the kit suppliers...?

To be fair, when China gives America the smackdown in international trade, Canada likes to point and laugh.

We should have taken Canada when we had the chance. My hope is that Canadians appreciate the security that our great nation provides the people of that once distressed but now much favored land.

His Excellency,

George Washington

Not true. The trade in the example could lead to both teams having more fan support, and thus making more money (even if only one wins when they play each other), whereas the coaching example would benefit only one team. Even if you thought professional sports was only about winning games, and not about making money, there are more than two teams in a league, so the trade could increase the number of wins of both teams, even though only one team can win when they play each other.

Agree but that's broadening the analogy beyond the initial way it was used. Likewise it wasn't used to include the gain to fans, etc.

Except the owners of the G7 team stopped paying in G7 countries, and started only showing the games on TV, all played in the new countries.

And the new teams didn't play by the same rules that the G7 teams did, even though they competed with each other.

The change in the 1990s was the internet.

The "wins" are unevenly distributed.

Humans have neurological, psychological, and cultural equipment to detect status hierarchies - which, in turn, regulates neurotransmitters and hormones. This makes humans very sensitive to changes in status, especially losses.

The losers in the G7 can vote.

I predict chaos.

There are always a lot of resentful people among the voters. Democracy is always somewhat chaotic.

There was a time when Americans used to build things. Cars, computers, TV sets, the Interstate Highway System, moon landing modules. But Americans exchanged their firstborn industrial rights for a mess of trinkets and debt. Now Americans are expected to make a living by sellingnone another apps and derivatives. Meanwhile, good jobs depart tomRed China, who built a powerful industrial base it uses to threaten its Asian neighbors and the West. We, in the West, are told it is good because we will have cheap underwear for our time. It is Munich all over again.

But Americans exchanged their firstborn industrial rights for a mess of trinkets and debt.

Now we know how the Native Americans feel.

Those who cannot remember the past are condemned to repeat it.

You're fun. "Firstborn industrial rights." Notify the UN.

I was estblishing a parallel between America's behaviour and Esau's.

Yeah those are really good jobs in China putting together iPhones for 15 hours a day. Some of those workers even manage to avoid committing suicide.

Because American companies can starve and work Chinese workers to death. If those jobs had stayed in America, where they belong, nothing like that would be happening. America could pay a honest day's pay for a honest day's work in the 1950's. Why can't it do the same thing today?

"Good jobs"? What are the wages and working conditions of those Chinese factory workers?

Lower than their American counterpats used to earn and higher than Chinese peasants used to make. America is growing rich on America's worker's backs. In any other time, it would have been considered an act of war, but Americans sold their children into bondage. Remember Romney saying that, before spending public money, he would ask himself if the program was worth asking China money. Hillary Clinton said America can not go be on Red China because China is America's banker. Under Chinese economic attack, America has become a nation at risk.

Look at the Baltic dry dex as an indicator of shipping costs. Note that it has a volatility of about 10%. No coach can make any player trade least it is greater than transportation uncertainty. The effect is for each party to take advantage of comparative advantage, then get stuck. The coaches have segmented the players such that few or none players stand above the baltic dry index uncertainty, players have to be shipped around.

Poor comments today. Lots of focus on how playing a game ( football or whatever) is zero sum, but trading players is not zero sum. Whatever the merits of the analogy his main point was on the three phases of globalization, the movement of goods, know how, and labor and how we are on the cusp of the third one through virtualization. It's happening without any coordinated efforts to make it so, just like smartphones became dominant and its consequences may well be profound and hard to predict. I like his arguments

Yeah, the trolls are out to make a point more so than usual in this thread. Of interest, ideas are supposed to be non-rival, but Nick Rowe here says they may not be: http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/are-ideas-really-non-rival.html

In short, G7 nations are trying to make trading ideas a rival good, but the laws of economics, not to mention the diffusion of ideas, not to mention unauthorized transfer of ideas (IP theft) make trading ideas a non-rival good.

Bonus trivia- Comment from the above also good, mentions patents: The original issue of non-rival goods is really about digital media, patents, software, and other goods with zero cost of reproduction that fall under the rubric of intellectual property. These goods play a *huge* role in our economy -- it's what all the TPP fuss is about. Non-rival goods have eclipsed rival goods in the production process -- more than half of the market value of SP 500 firms consists of intangibles.

I thought that Nick Rowe's argument was pretty good, and would help explain why Silicon Valley is unique. Culture is in some senses like a set of ideas (and behaviors), and it is pretty difficult for people to learn a new culture, and pretty difficult to teach it to someone as well. So it is easy to export something that is patentable, but very difficult to export the things that produced the patents.

The problem is the analogy is so poor that it is difficult to divine what not-hopeless-mangled interpretation to give it that would make sense without the horrible analogy it is hung upon. He's arguing that the exchange is zero-sum to the workers whose "advantage" is being traded, but in reality, all of the "losers" are really winners in different ways. And anyway advantage is not a piece of property. It's just bad on multiple levels, so bad as to be worthless. You have to reconstruct it from the ground up using a different analogy to make it make any sense.

I like how "the rest of the world" = China and India.

Basically half of the people in the world that aren't in the G7...

Would the analogy work better with some new offensive gimmick?

Let's say I pay my head coach handsomely to implement a spread offense suitable for the speed of NFL players. It also makes sense to get well-paid assistants. This helps me win in the short term. In the long term, Other teams study tape and hire my assistants. The advantage I (and my ticket-buying fans) paid for is gone, but every offense in the league is more entertaining and my absolute revenues are still higher.

The globalists are far too glib on the impact of multinationals on living standards in developed nations.

Chronic trade deficits can lead to lower gross national income and exploding property prices.

If it were up to me, Red China would be subject to a full scale nuclear offensive.

How Christian of you.

So that is it. We should turn the other cheek ... as in Munich. How many lives would have been saved if Nazi Germany had been nuked in 1938?

Lol. They didn't have The Bomb in 1938, Einstein.

That's why I said "if"! And I chose 1938 because it was the year before WWII started.

No! World War II started in Aug 1942, when Brazil declared war on the Axis powers, making the conflict truly global in scale and extent.

Within 6 months Brazil had reversed the tide of war, with crushing defeats on the enemy in the battle of the Atlantic (Brazilian Navy attacked German submarines a total of 66 times), and with the powerful Brazilian expeditionary force to invade Italy, which forced them out of the war.

There is no such thing as "New Globalization". There is just globalization as it has been for centuries. What counts for nations is the terms of trade. The US has ceded its advantages through disastrous trade deals for decades now.

These issues are not new. See: "The National System of Political Economy" by Friedrich List. This was a contemporary critique of Adam Smith's work.

Also see: https://canonicalthoughts.blogspot.com/

I feel that the article’s main point, “Our 20th-century paradigms of globalization are ill-equipped to understand what cross-border trade means for the present and near future” is somehow misleading.

The writer argues that there are three stages (associated with each stage is its cost) of globalization: (1) moving goods, (2) moving ideas, and (3) moving people. Our 20th-century paradigms of globalization were successful in explaining # 1 but #2 and #3 are something entirely new that require new paradigms.

I think the classical trade theory, that we learnt during under graduate degree classes, has more or less explained the ‘new’ globalization fairly well. Here are the proofs:

1. The much celebrated factor-price equalization theorem written in 1948 precisely discusses the connection between trade of products and trade of factor. To be more specific, free trade of goods (and we can easily think of services as well) will not only equalize the goods' price across borders but will also equalize the return of the factor who are building these products. Thus it clearly indicates that trade of goods and services are a substitute for trade of factors such as labor.

2. Selling ideas can be thought as selling services. Thus the movement of ideas is basically trade of services across countries which is already been incorporated in #1.

3. Finally, the author’s argument that “International competition can reach inside the factory for an individual stage of production and offshore it” basically relates to finer stages of specialization. The much celebrated trade theory of 1930’s and the Heckscher–Ohlin model discuss the main points of the ‘new globalization’. Resource differential (here it is skill) creates opportunity cost differential. That in turn generates the incentive for increased specialization. Higher specialization allows increased opportunity for arbitrage across borders. As our economy becomes more technology intensive, skill is becoming a more specialized concept thereby incentivizing individuals to pursue higher specializations and globally trade their services.

This 'New globalization' is basically the rapid growth of service/skill trade (in authors language - the ‘moving ideas') that is an outcome of rapid growth in automation and digitization. But this future potential, that he terms as the new face of global trade, was very much incorporated in our classical trade theory. I feel what is new is its rapid realization.

Finally, the multiple mention of job losses, perceived unfairness, and workers' resentment can be a very partial picture. Though its certainly a reality in parts of the G7 countries, but the story is very different in the developing world where a large number of people are able to unshackle the life of low wage, extreme poverty, less freedom, gender bias etc. For them, the main liberating force is nothing but this ‘new face of globalization’ that’s hard to stop with tariff barrier. For many of the workers of Thailand, Bangladesh, India, and China the new globalization and it’s future is certainly not a 'job apocalypse'.

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