How technology shapes globalization

In the pre-COVID-19 pandemic era, global economic concerns frequently centered on issues involving trade conflicts and the threats posed by a surge in populist rhetoric and protectionist measures. President Trump’s “America First” approach signaled a clear break from a decades-long U.S.-led multilateralist agenda focused on furthering cross-border trade liberalization. The Trump administration backed up its rhetoric by pulling out of the Trans-Pacific Partnership (TPP), by renegotiating the North American Free Trade Agreement (NAFTA) and by engaging in a series of trade conflicts (that saw the imposition of tit-for-tat tariffs, sanctions and other forms of trade barriers) with key trading partners, including the European Union and China. The pandemic shock has spurred fresh concerns regarding the excessive reliance on China-centered global supply chains for critical goods such as pharmaceuticals, medical gear and equipment, and electronics. The confluence of such recent developments has led some to openly wonder if we are entering a new era of deglobalization or, at the very least, an era of slowbalization.

To many economists, the never-ending battle to convince politicians and the wider public of the overall benefits of international trade often appears to be a Sisyphean task. While many in the general public are aware of, and somewhat confused by, comparative advantage as a basis for engaging in trade, it is often more intuitive to think of international trade as a form of technology.

Just as with any major technological breakthrough, there will be a reduction in labor demand in some quarters but net overall gains in productivity and output at the economy-wide level associated with international trade. Those who oppose new technology are labeled luddites, while those who seek and support trade protectionist measures are often called populists or nationalists. Instead of disparaging those seeking to hinder trade liberalization and greater cross-border flow of goods and services (the case for free capital mobility is actually less clear), the public would be better served, and the discourse regarding international trade (as well as on technological changes) enhanced, if economists highlighted the extraordinary interconnectedness between globalization and technology revolutions, and their joint role in influencing major historical trends. 

In two recent books, “The Great Convergence: Information Technology and the New Globalization” and “The Globotics Upheaval: Globalization, Robotics, and the Future of Work,” economist Richard Baldwin offers an excellent overview of the past, present and future drivers of globalization. Baldwin suggests that the cost of moving goods (trade costs), the cost of moving ideas (communication costs) and the cost of moving people (face-to-face costs) are three constraints that limit the separation of production and consumption, and thus act as restraints on globalization itself. 

Starting in the early 1800s, steam-powered ships and railways dramatically reduced the cost of moving goods across borders. This, according to Baldwin, gave rise to the “first unbundling” as people were now able to consume goods produced in faraway lands with relative ease as production and consumption of goods could be geographically separated. This first modern era of globalization led to the “great divergence” between the industrializing north (today’s G-7 countries) and the raw material supplying south (today’s developing and emerging economies).

Another era of globalization began in the 1990s as the information and communication technology (ICT) revolution triggered the “second unbundling” — the cost of moving ideas and transferring knowledge fell dramatically and it became feasible to coordinate complex activities from a distance. The resultant offshoring/outsourcing phenomena and the emergence of global supply chains led to the rise of China, India and other so-called emerging market economies and enabled the “great convergence” (the gap between the Western world and the emerging economies narrowed even as within-country inequality rose almost everywhere) phase of globalization.

As the trade wars and the pandemic force a rethink of global supply chains, the sun may be setting on this phase of globalization. Nearshoring and greater supply chain resiliency are likely to reshape goods manufacturing and trade patterns in the coming years. Diversifying away from China, however, is likely to pose a challenge in the short run.

Meanwhile, Richard Baldwin and other economists suggest that we are on the cusp of a new revolution that may trigger a different phase of cross-border interconnectedness. With the emergence of digital technology, artificial intelligence and remote intelligence, a “third unbundling” is unfolding — telepresence, telerobotics and telemigration will radically reduce the cost of face-to-face interactions and enable the ability to undertake service functions remotely from anywhere in the world. The pandemic shock may have provided additional momentum to this process.

Given that technological innovations have largely induced new waves of globalization over the past two centuries, policymakers and the general public need to focus more on dealing with the labor market and societal impact of these revolutions rather than on trying to limit fundamental forces shaping our modern productivity-driven economies. As knowledge requirements evolve rapidly and as demand for certain types of labor shifts quickly, the necessity for well-designed shock absorbers and social safety nets is becoming apparent. 

Sadly, the mostly septuagenarian political leaders in the U.S. are still stuck debating 20^th century challenges and arguing about largely irrelevant bilateral trade balances even as the U.S. and the world economy transitions towards a new and radically different phase of technology-driven globalization. Historical perspective on globalization will aid citizens and future policymakers in acquiring the necessary knowledge to plan for the inevitable dislocations that are likely to pose challenges for workers and the broader society.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.