Honey, who shrunk the world?

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August 20, 2021

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By Paul Krugman

Opinion Columnist

When I was in my 30s, my parents gave me a sweatshirt bearing the words "Global shmobal." At the time, I was going to many economics conferences; when my parents would ask me what the latest conference was about, I apparently always replied, "Global shmobal."

What I didn't know at the time was that the global was about to get even shmobaler. In the mid-1980s, world trade had recovered from the disruptions and protectionism of the interwar period, but exports as a share of world G.D.P. were still back only to around their level in 1913. Starting around 1988, however, there was a huge surge in trade — sometimes referred to as hyperglobalization — that leveled off around 2008 but left the world's economies much more integrated than ever before:

Exports as percentage of world G.D.P.World Bank

This tight integration has played an important background role in pandemic economics. Vaccine production is very much an international enterprise, with production of each major vaccine relying on inputs from multiple nations. On the downside, our reliance on global supply chains has introduced forms of economic risk: One factor in recent inflation has been a worldwide shortage of shipping containers.

But how did we get so globalized? There are, it seems to me, two main narratives out there.

One narrative stresses the role of technology, especially the rise of containerized shipping (which is why the box shortage is a big deal). As the work of David Hummels, maybe the leading expert on this subject, points out, there has also been a large decline in the cost of air transport, which is a surprisingly big factor: Only a tiny fraction of the tonnage that crosses borders goes by air, but air-shipped goods are, of course, much higher value per pound than those sent by water, so airplanes carry around 30 percent of the value of world trade.

By the way, pharmaceuticals, presumably including Covid-19 vaccine ingredients, are mainly shipped by air:

This is what it looks like when drugs fly.Brookings

An alternative narrative, however, places less weight on technology than on policy. That's the narrative one often sees associated with Trumpists (although they're not the only ones with something like this view): Globalists pushed to open our borders to imports, and that's why foreign goods have flooded into our economy.

And the truth is that from the 1930s up to Donald Trump, the U.S. government did, in fact, pursue a strategy of negotiating reductions in tariffs and other barriers to trade, in the belief that more trade would both foster economic growth and, by creating productive interdependence among nations, promote world peace.

But the long-run push toward more open trade on the part of the United States and other advanced economies mostly took place before hyperglobalization; tariffs were already very low by the 1980s:

Tariffs over time.USITC

While there weren't big changes in the policies of advanced economies, however, there was a trade policy revolution in emerging markets, which had high rates of protection in the early 1980s, then drastically liberalized. Here's the World Bank estimate of average tariffs in low and middle-income countries:

Average tariffs in low- and middle-income nations.World Bank

You might ask why a reduction in emerging-market tariffs — taxes on imports — should lead to a surge in emerging-market exports. So let's talk about the Lerner symmetry theorem — or, actually, let's not and just say that tariffs eventually reduce exports as well as imports, typically by leading to an overvalued currency that makes exporters less competitive. And conversely, slashing tariffs leads to more exports. Basically, nations can choose to be inward-looking, trying to develop by producing for the domestic market, or outward-looking, trying to develop by selling to the rest of the world.

What happened in much of the developing world during the era of hyperglobalization was a drastic turn toward outward-looking policies. What caused that trade policy revolution and hence helped cause hyperglobalization itself?

The immediate answer, which may surprise you, is that it was basically driven by ideas.

For more than a generation after World War II, it was widely accepted, even among mainstream economists and at organizations like the World Bank, that nations in the early stages of development should pursue import-substituting industrialization: building up manufacturing behind tariff barriers until it was mature enough to compete on world markets.

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By the 1970s, however, there was broad disillusionment with this strategy, as observers noted the disappointing results of I.S.I. (yes, it was so common that economists routinely used the abbreviation) and as people began to notice export-oriented success stories like South Korea and Taiwan.

So orthodoxy shifted to a much more free-trade set of ideas, the famous Washington Consensus. (Catherine Rampell suggests that should be the new name for D.C.'s football team. Nerds of the world, unite!) The new orthodoxy also delivered its share of disappointments, but that's a story for another time. The important point, for now, is that the change in economic ideology led to a radical change in policy, which played an important role in surging world trade: We wouldn't be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls.

There are, I think, two morals from this story.

First, ideas matter. Maybe not as much as John Maynard Keynes suggested when he asserted that "it is ideas, not vested interests, which are dangerous for good or evil," but they can have huge effects.

Second, it's a corrective against American hubris. We still tend, far too often, to imagine that we can shape the world as we like. But those days are long gone, if they ever existed. Hyperglobalization was made in Beijing, New Delhi and Mexico City, not in D.C.

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