This article is part of the IFF China Report 2019

Globalization was born out of mercantilism, at the origin of the economic theory of comparative advantage. The theory states that, under free trade, if a country specializes in producing goods with lower opportunity costs, there will be an increase in economic well-being.

Paul Krugman proposed a similar theory, which further popularized the terms “economies of scale” and “economies of scope”. Economies of scope focus on the average total cost of production of a variety of goods, while economies of scale focus on the cost advantage that arises when the level of production of a single product is higher. . The result is a competitive market.

IFF China 06 Liu Jun

Liu Jun

Wolfgang Stolper and Paul Samuelson highlight the Stolper-Samuelson theorem in the book Protection and real wages. He states that in any country an increase in the relative price of the labor-intensive commodity will improve labor and worsen capital, and vice versa. Under protectionist policies, companies have less incentive to move production to where cheaper labor is available, but when these policies are removed the incentive disappears.

This shift in capacity and the constant changes in the supply chain are a result of past globalization and give rise to trade disputes and trade frictions as we see today.

Companies are continually changing their position in the supply chain – those downstream advance, while upstream ones advance even more. In this case, traditional productivity factors – capital, labor, and technology – all play a role, but the role of capital and labor becomes more important as the firm moves up the supply chain, resulting in to trade disputes.

The best performers of past globalization

The “four Asian tigers” – Hong Kong, Taiwan, Singapore and the Republic of Korea – have benefited greatly from the last period of globalization. From 1956, over a period of 30 years, they experienced rapid development, fueled by rapid industrialization and exports, which aligned these economies with the richest nations in the world. In practice, all four countries should have been able to maintain their growth, but began to lose their competitive edge in the 1990s (see figure 1).

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During this time, two different growth concepts have emerged – the “smiling curve” and the “Musashi curve”. The first suggests the two ends of the value chain – research and development (R&D) and marketing – are more important than the middle part of the value chain – manufacturing. The latter, proposed by Japanese economist Nakamura Suehiro, argues that value should be added to production rather than branding or technology. The two curves do not exist to cancel the other; one and should serve as a reference for companies to design development strategies according to their industries.

According to the theory of comparative advantage, each element is fixed at a certain place in the supply chain, so that the structure of world trade will remain relatively stable. If advanced countries are replaced, other countries jump in the chain, inevitably leading to friction and disputes.

China’s development over the past four decades could be called miraculous. What is impressive is not only the speed at which the country has developed, but also the industries in which it has become competitive. Over the past 10 years, the value of production in these fields has continued to increase (see Figure 2). Meanwhile, China has tried to develop science and technology to advance its manufacturing systems (see figure 3).

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Source: World Bank

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Source: National Bureau of Statistics of China

Could globalization be reversed?

While globalization has undoubtedly contributed to global growth and reform, it is not without challenges. Some parties accuse globalization of accelerating the polarization between rich and poor, while undermining employment. Populism and nationalism, the differentiation of GDP policy trends and divergences have resulted.

Even in the most recent form of outgoing globalization, it is difficult to define whether there has been a trade deficit or surplus between China and China. we. From a value chain perspective, China has a trade deficit in its services sector and a trade surplus in products. It was difficult to interpret the trade surplus or deficit between the two countries, even in the discourse of previous surges in globalization. As we enter the next phase of globalization, we need to think about the problem differently.

Science has become a major force behind productivity. In the past, capital, labor and land were the main factors, but the modern economy is now structured differently. It has become a three-dimensional value chain where countless value chains are combined into one system. What ultimately decides your position depends on total factor productivity, rather than just a few factors.

Productivity has an increasing influence on total economic growth (see Figures 4 and 5). In the past, it took several years for a new technological product to gain a substantial user base; however, for example, it took less than a year for the smartphone game Candy Crush to gain 100 million users. The production and consumption processes have undergone dramatic changes, demonstrating that globalization is a force.

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Source: Conference Board, Boston Consulting Group ITU; Venture Beat

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Source: Conference Board, Boston Consulting Group ITU; Venture Beat

Real globalization

Some people may still believe that the top three players in the auto industry are General Motors, Ford, and Chrysler. However, Uber and Tesla have much more market share. Uber is not a manufacturing company but a technology company that operates transportation as a service; he has a monopoly on the market. Tesla, an automaker, has gained the monopoly thanks to the technology it is developing. Meanwhile, Boeing does not produce aircraft components, but is the world’s largest aircraft manufacturer. Companies deploy their workforce, product sales, R&D and branding globally. It is true globalization.

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Source: FactSet

IFF China 6 fig7

Source: FactSet

Past examples of globalization rely on successful supply chains, while today’s economies are largely driven by technological advancements. Recently, Chinawe trade disputes, some research shows that the pressure on US companies has been greater and losses greater, while Chinese companies have not been affected to the same extent.

Since the success of globalization is largely technology driven, science and technology will undoubtedly be the driving force in the future. the we is the biggest technological powerhouse, with many important companies based in Silicon Valley. It is home to the majority of the research and investment in that space, while the actual manufacturing takes place elsewhere. As a result, the we is more likely to suffer the most when domestic trade disputes and disputes arise. From upstream to downstream, from production to consumption, from goods to service, technology occupies a dominant position. Once trade disputes emerge, the initiators, inventors and owners of the technology will suffer the most.

What will the next stage of globalization look like? In Shaping the Fourth Industrial Revolution, Klaus Schwab and Nicholas Davis say we are at the start of a revolution that is fundamentally changing the way we live, work and interact. Internet speeds will be dramatically increased with the introduction of 5G, with 6G now in the works. The future is an environment where sea, land, sky and space will be connected through corresponding systems. Quantum technology will be able to label every item in the world down to the last grain of sand. Trade disputes will be easily resolved as products and services are identified so that members of the public can recognize which countries are running trade deficits or surpluses. Blockchain technology – which already facilitates cross-border payments – could help stabilize global trade flows. Empowering science and technology is a workable solution to disputes.

Perhaps the next step in globalization should be called universalization – a strategy that integrates the oceans, land, sky and beyond.

This article is part of the IFF China Report 2019, which draws primarily on content provided by the China-based think tank, the International Finance Forum, and is published in association with the Central Bank.

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