The Economist summarizes what looks to be an improved economic approach to globalization, outsourcing and off-shoring (hat tip: New Economist).
Globalisation
is a big word but an old idea, most economists will say, with a jaded
air. The phenomenon has kept the profession’s number-crunchers busy,
counting the spoils and how they are divided. But it has left the
blackboard theorists with relatively little to do. They are confident
their traditional models of trade can handle it, even in its latest
manifestations. For example, Greg Mankiw, of Harvard University, has
concluded that “services offshoring fits comfortably within the
intellectual framework of comparative advantage built on the insights
of Adam Smith and David Ricardo.”
Ricardo
illustrated his insights with the example of Portuguese wine trading
for English cloth. But some trade theorists think this metaphor will no
longer do. Indeed, two of them—Gene Grossman and Esteban
Rossi-Hansberg, of Princeton University—published a paper last year subtitled “It’s not wine for cloth anymore.”
Ricardo, it
seems, did only half the job. He described the first of two “great
unbundlings”—as Richard Baldwin, of the Graduate Institute of
International Studies in Geneva, has put it in a recent guide.
Trade in wine, cloth and other goods allows production to be distanced
from consumption. Countries do not need to grow grapes to enjoy the
fruit of the vine; thanks to trade, they can transform cloth into wine
instead.
But in
Ricardo’s world, a country must still take care of all of the separate
tasks required to finish the goods it makes. In a country of pinmakers,
to take Adam Smith’s seminal example, someone must still cut, draw and
straighten the wire; fashion and affix the head; then whiten and sheath
the finished product, if any pins are to be made at all.
In the second
great unbundling, production is spliced and diced into separate
fragments that can be spread around the globe. Pin-whitening is done in
one country; wire-cutting in another. Some theorists call this the
“vertical disintegration of production across borders”. Thankfully,
Messrs Grossman and Rossi-Hansberg have a more felicitous phrase:
“trade in tasks”.
As
globalisation has advanced, it has become easier to move some of these
tasks offshore. For the workers who once carried them out, this has
three possible consequences, two bad, one good. Start with the good
news. Offshoring makes firms more productive. The tasks that are best
kept close to home remain onshore; other tasks can be taken care of in
cheaper places abroad. Everyone benefits from this gain in
productivity, including the workers who have fewer tasks to perform.
For example, Japanese electronics companies continue to flourish in
American markets precisely because they have moved their assembly lines
to China.
The second
potential consequence of offshoring might be called the “Lou Dobbs
effect”, after America’s most prominent television mercantilist. When
some tasks are taken overseas, that leaves less work for patriotic
Americans to do, right? Well, maybe. If a whole industry leaves
America’s shores, demand for labour will ebb, and wages will fall. But
in less extreme cases, relieving workers of some of their tasks
(wire-cutting for example), allows the domestic industry to expand—and
a bigger industry might find room for the displaced wire-cutters, at
the same wage, albeit on different tasks.
Offshoring,
it is clear, enables companies to make more stuff. But this can be a
mixed blessing. If the home industry makes too much, it will depress
the price of its exports on world markets, damaging the country’s terms
of trade, and hurting workers. This result is sometimes called the
“terms of trade effect”.
Messrs
Grossman and Rossi-Hansberg describe this as a “new paradigm”, a phrase
guaranteed to raise the hackles of more cautious scholars. Their model
may not be quite that, but nor does it sit altogether comfortably
within trade economists’ established way of thinking. That tradition
painted in bold strokes, and identified clear winners and losers from
globalisation. Economists felt sure they could predict what would be
traded and who would get hurt. As Mr Baldwin points out, they made
pronouncements about entire “sectors” of the economy (heralding the
dawn of some industries; the twilight of others) and whole classes of
workers (the college-educated versus the rest) whose fortunes were tied
to them.
A bundle of results
The new breed
of models paint globalisation with a much finer brush. (It is
high-resolution globalisation, Mr Baldwin says.) International
competition plays out not just at the level of the industry, or even
the firm, but right down at the level of individual tasks—assembly,
packaging, data entry—that cut across whole sectors of the economy.
Moreover, in a break with most traditional models, the new theories do
not take the tradability of things as a given. For Messrs Grossman and
Rossi-Hansberg, the ease of trading a particular task is a matter of
degree not kind; and it is a variable, not a constant. Hence tasks that
seem safe from foreign competition today may not be so tomorrow.
Finally, the tradability of a task might bear no relation to the amount
of skill it requires. As a result, the victims of globalisation are
harder to identify and the salves harder to apply.
So is
globalisation to blame for the rich world’s recent anxieties or not?
Unfortunately, the new theories of offshoring can deliver opposite
verdicts depending on precisely how they are set up. As James Markusen,
of the University of Colorado, mischievously puts it, “I am confident
that I can concoct a model to generate any result desired by a reader
with a deep pocketbook.” If only every worker were as versatile.
Grossman and Rossi-Hansberg’s paper is here.
A nice report by Richard Baldwin on globalization and the great unbundling is here.
