What does recent research tell us about the pains and gains of globalisation?

The “second wave of globalisation”: the ICT revolution and the new international division of labour

Throughout history, technological improvements progressively allowed the separation of economic activities in space, a process commonly known as “globalisation”. The radical reduction in transport costs brought in by the industrial revolution prompted the first wave of globalisation (circa 1870-1914) and permitted the “unbundling” of production and consumption across countries. As a result, the world trade-to-GDP ratio rose from 9% to 16%.

The early 1990s saw the advent of a second wave of globalisation, when the ICT¹ revolution radically decreased the costs of communicating over long distances. Being able to coordinate activities across borders, firms started taking advantage of the international differences in production costs, locating parts of the production process in different countries. Manufactures began to be produced under a new international division of labour: value added by human physical capital became concentrated in developed economies, with the most unskilled-intensive parts of production disproportionally located in low-wage developing economies (Timmer et al., 2014).² One widely cited example of such “Global Value Chains” (GVCs) is the production of the iPad by Apple, which was designed in California and assembled in China from pieces manufactured in Asia, Europe and Brazil. Goods are now “made in the world”.

World trade surged in the new era of “hyperglobalisation”. International trade flows are dominated by intermediate inputs (“vertical” trade) exchanged among dissimilar countries, as exemplified by the iPad. The bulk of such trade has been concentrated in a handful of developing economies, most of them in Asia, among which China stands out.

Euphoria and disenchantment

The second wave of globalisation was embraced with strong optimism, grounded on sustained growth observed in the developing world in particular. However, the enthusiasm has been obscured by mounting scepticism, especially in the developed world in the aftermath of the 2008 crisis, when anti-globalisation sentiments grew stronger, allowing the rise of protectionism and political movements with strong anti-trade rhetoric (Baldwin and Evenett, 2009; Rodrik, 2018).

In what follows, I review research studying the pains and gains from globalisation from the perspectives of workers and consumers. The review is not intended to be exhaustive, and it is biased towards research produced at the Banque de France. I use a narrow definition of globalisation that concerns international trade flows, leaving out other important aspects such as financial globalisation or migration flows. I start by briefly reviewing the viewpoint of economic theory.

The economics of trade integration

It is conventional wisdom in economic theory that trade is beneficial because it allows a better allocation of resources (technically, it is equivalent to an expansion in the world’s production frontier). The principle of comparative advantage implies that countries export goods for which costs are low and import those that are relatively expensive to produce locally. Every country wins from this “sell high, buy low” logic. Within countries, consumers are the big winners of trade liberalisation, benefitting from lower prices and greater product variety.³

There is also consensus in that trade involves strong redistribution effects. The Stolper-Samuelson theorem (Stolper and Samuelson, 1941), originally developed in the context of the Heckscher-Ohlin model as sketched here, unambiguously predicts that at least one factor sees its real return decrease with trade integration. Imagine a country that produces computers and textiles using skilled and unskilled labour, with computer production being relatively skill-intensive. If the computer sector is the exportable one, the relative demand for skilled workers increases raising their wages. Textile production declines, generating excess supply of unskilled workers, whose wages decrease. More importantly, workers win or lose in real terms.

Nevertheless, the traditional approach showed itself to be unfit to fully depict the current phase of globalisation. Evidence starkly shows that only the most productive firms in an internationalised sector become exporters, importers and/or multinationals (Bernard, Jensen, Redding and Schott, 2012). These firms expand with trade integration while others feel the pain of import-competition. Today’s winners and losers are not entire sectors, but individual firms. Hence, workers endowed with identical sets of skills can be differently affected depending on who employs them. The impact of offshoring on domestic factors depends on whether they substitute or complement foreign factors in production.⁴ Some occupations and skill categories benefit from offshoring while others tend to lose, mainly those in competition with foreign factors (typically, unskilled labour). Still, offshoring can make everyone better off if productivity gains are large enough (Grossman and Rossi-Hansberg, 2008). Similarly, exporting can lead to higher skill demand when it requires technological or quality upgrading (Yeaple, 2005; Bustos, 2011).

Empirical evidence

A large amount of empirical evidence confirms such intuitions. I focus on key contributions that are representative of the context within which the research is undertaken at the Banque de France.

The pains: unequal labour market effects

Hummels et al. (2014) use detailed employer-employee data and document a positive causal effect of offshoring on the skill premium in Denmark. Exports raise wages for all workers and can more than compensate the losses of unskilled workers caused by offshoring. Similar conclusions are obtained from more aggregate approaches. A series of papers summarised in Autor, Dorn, and Hanson (2016) documents employment losses and deterioration of labour market outcomes in the US regions exposed to Chinese imports – the “China shock”. Feenstra et al. (2018) argues that the job-creation effects of exports imply a net employment gain for the United States. A proper assessment requires a general equilibrium approach as in the ongoing work of Caliendo, Dvorkin and Parro (2017). They estimate that the China shock explains 25% of the fall in US manufacturing jobs during 2000-2007, creating strong regional disparities but overall welfare gains for the United States.

Results from research undertaken at the Banque de France

The research conducted at the Banque de France uses data for French firms and workers, providing support for the theoretical predictions and nurturing the policy debate in France.

Carluccio, Fougère and Gautier (2015) used data for manufacturing firms from 2005-2009, and found exports increased wages for all occupations. Offshoring leads to higher wages for executives. It hurts blue-collar wages only in firms without collective bargaining agreements, highlighting the role of labour market institutions. Carluccio, Fougère and Gautier (2016) suggested the bargaining regime itself might be endogenous: firms with positive exports shocks tend to bargain more often on wages.⁵

Carluccio, Cunat, Fadinger and Fons-Rosen (2017) adapted the Heckscher-Ohlin model to feature trade in inputs and heterogeneous firms. Northern firms specialise in producing skill-intensive inputs and offshore production of labour-intensive inputs to countries abundant in unskilled labour. Firm heterogeneity implies only the biggest firms self-select into importing, generating a link between firm size, offshoring status, and skill demand. Most of the increase in skill demand in French manufacturing during 1996-2007 was due to firms importing from labour-abundant countries.

Malgouyres (2016) replicated the analysis of Autor et al. (2016). 13% of job losses in French manufacturing during 1995-2007 could be attributed to the French “China shock”.

The flip side is a more equal North-South income distribution, labelled by Baldwin (2016) as the “Great Convergence”. In the model by Carluccio, Ekeland and Guesnerie (2017) these two dimensions are intertwined. Higher integration of the South in GVCs makes global goods cheaper, raises wages in the South, reducing the North-South wage gap. Higher demand for global goods makes labour in the North shift towards the GVC, increasing the skill premium (under the plausible assumption that GVCs are more skill-intensive than non-tradables).

The gains: cheaper and more diversified consumption

Surprisingly enough, it is only recently that efforts have been put into seeking to quantify the consumer welfare gains of trade. Broda and Weinstein (2006) estimated that the number of imported product varieties increased by a factor of four during 1972-2001 in the United States, constituting the source of consumer gains in models with “love-for-variety” preferences. An important strand of the literature, summarised in Costinot and Rodriguez-Clare (2014) builds qualitative models to put numbers on the welfare effects of policy changes like lowering trade tariffs. One message is that there are welfare gains from trade, albeit modest.

Another approach links trade data with domestic price data and estimates reduced-form equations with instrumental variables. Auer and Fischer (2011) and Auer, Degen and Fischer (2013) showed that low-wage country imports reduced PPI inflation in the United States and Europe respectively. Amiti, Dai, Feenstra and Romalis (2017) found that the China trade shock reduced the US manufacturing price index by 7.6% between 2000 and 2006. Two-thirds of the effect is due to China’s reduction of its own import tariffs, accessing cheaper intermediate goods allowing Chinese firms to gain US market shares.

For France, Carluccio, Gautier and Guilloux-Nefussi (2018) used detailed product-level import data to dissect the impact of imports of consumption goods in the French CPI. Imports from low-wage countries reduced French inflation by 0.15 percentage points per year during 1995-2017. The effect arises from substitutions towards cheaper imported goods and the lower domestic prices induced by import competition.

Monetary policy in a globalised world

The last point raises the issue of the conduct of monetary policy in the globalised world (see Rogoff, 2006). I would like to mention two points. First, globalisation has been pinpointed as one explanation of the “flattening” of the Phillips curve (Guilloux-Nefussi, 2017). Second, GVCs can generate a de-correlation between CPI and PPI indices (Wei and Xie, 2018), raising the question of which should be the target of monetary policy.

References

Amiti (M.), Dai (M.), Feenstra (R.C.) and Romalis (J.) (2017) “How Did China's WTO Entry Benefit U.S. Consumers?”, NBER Working Paper, No. 23487.

Auer (K.D.) and Fischer (A.M.) (2010) “The Effect of Low-Wage Import Competition on US Inflationary Pressure“, Journal of Monetary Economics, Vol. 57(4), pp. 491-503, May.

Auer (K.D.) and Fischer (A.M.) (2013) “Low-Wage Import Competition, Inflationary Pressure, and Industry Dynamics in Europe”, European Economic Review, Vol. 59, pp. 141-166, April.

Autor (D.), Dorn (D.) and Hanson (G.) (2016) “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade”, Annual Review of Economics, 8, pp. 205-240.

Baldwin (R.) (2016) “The Great Convergence: Information Technology and the New Globalization” Harvard University Press.

Baldwin (R.) and Evenett (S.)(2009) “Introduction and Recommendations for the G20,” in “The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20, Chapter 1, pp. 1-9”, ed. Richard Baldwin and Simon Evenett (London, CEPR).

Bernard (A.B.), Jensen (J.B.), Redding (S.J.) and Schott (P.K.) “The empirics of firm heterogeneity and international trade”, Annual Review of Economics, 4 (1), pp. 283-313.

Broda (C.) and Weinstein (D.E.) (2006) “Globalization and the Gains From Variety”, The Quarterly Journal of Economics, Vol. 121, Issue 2, pp. 541-585, May.

Bustos (P.) (2011) “Trade Liberalization, Exports and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinean Firms”, American Economic Review, 101 (1), pp. 304-340.

Caliendo (L.), Dvorkin (M.) and Parro (F.) (2015) “Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock”, NBER Working Paper, No. 21149.

Carluccio (J.) and Bas (M.) (2015) “The Impact of Worker Bargaining Power on the Organization of Global Firms”, Journal of International Economics, 96(1), pp. 162-181.

Carluccio (J.), Cunat (A.), Fadinger (H.) and Fons-Rosen (C.) (2016) “Offshoring and skill-upgrading in French manufacturing: a Heckscher-Ohlin-Melitz view”, Banque de France Working Paper, 580 (also CEPR Discussion Paper No. 10864).

Carluccio (J.), Ekeland (I.) and Guesnerie (R.) (2017) “Fragmentation and wage inequality: insights from a simple model annals of economics and statistics”, forthcoming.

Carluccio (J.), Fougère (D.) and Gautier (E.) (2015) “Trade, wages and collective bargaining: Evidence from France”, Economic Journal, 125: 803–837.

Carluccio (J.), Fougère (D.) and Gautier (E.) (2016) “The impact of trade shocks on collective wage bargaining agreements”, CEPR Discussion Paper, 11289.

Carluccio (J.), Gautier (E.) and GuillouxNefussi (S.) (2017) “The effect of imports from low-wage countries on French inflation”, mimeo, Banque de France.

Costinot (A.), Arkolakis (C.) and Rodriguez-Clare (A.) (2012) “New Trade Models, Same Old Gains?", American Economic Review, Vol. 102, Issue 1, pp. 94-130.

Costinot (A.) and Rodriguez-Clare (A.) (2014) “Trade Theory with Numbers: Quantifying the Consequences of Globalization" Handbook of International Economics, Vol. 4, chapter 4, ed. Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff.

Feenstra (R C.), Ma (H.), and Xu (Y.) (2017) “US Exports and Employment”, NBER Working Paper, No. 24056.

Grossman (G.M.) and Rossi-Hansberg (E.) (2008) “Trading Tasks: A Simple Theory of Offshoring”, American Economic Review, 98(5), pp. 1978-97.

Guilloux-Nefussi (S.) (2016) “Globalization, Market Structure and Inflation Dynamic”, Banque de France Working Paper, 610.

Hummels (D.), Jørgensen (R.), Munch (J.R.) and Xiang (C.) (2014) “The Wage Effects of Offshoring: Evidence from Danish Matched Worker – Firm Data”, American Economic Review, 104, pp. 1597-1629.

Malgouyres (C.) (2016) “The impact of Chinese import competition on employment and the wage distribution: evidence from French local labour Markets”, Journal of Regional Science.

Rodrik (D.) (2018) “Populism and the Economics of Globalization”, Journal of International Business Policy.

Rogoff (K.) (2007) “Impact of Globalization on Monetary Policy”, The New Economic Geography: Effects and Policy Implications, Federal Reserve Bank of Kansas City, pp. 265-305.

Stolper (W.F.) and Samuelson (P.A.) (1941) “Protection and Real Wages”, The Review of Economic Studies, Vol. 9, No. 1, pp. 58-73, November.

Timmer (M.), Erumban (A.A.), Los (B.), Stehrer (R.) and de Vries (G.) (2014)”Slicing up global chains", Journal of Economic Perspectives, 28-2, pp. 99-118.

Wei (S-J.) and Xie (Y.) (2018) “On the Divergence between CPI and PPI as Inflation Gauges: The Role of Supply Chains”, NBER Working Paper, No. 24319.

Yeaple (S.R.) (2005) “A simple model of firm heterogeneity, international trade, and wages”, Journal of international Economics, 65 (1), pp. 1-20.

___________________________