What did global trade openness look like way back when?

Richard Baldwin, @IMD, 23 August 2024, Factful Friday.

Introduction.

The ratio of exports to GDP is a classic measure of trade openness. While it has many limitations (as I point out in a recent Linkedin post), it is the best we can do for years before 1960 or so. So, what does the openness ratio look like when you go way back—as far back as possible?

This week’s Factful Friday presents the longest data that I have found on the openness ratio.

It also throws out an open question to real economic historians:

• Is the Fouquin-Hugot data in the chart below the longest series we have for trade to GDP?

Trade openness since 1827.

The longest series I could find for the global openness ratio comes from Fouquin and Hugot (2016), which goes back to 1827. This is shown below.

While a crude measure of global economic integration, it is excellent for the role of organizing discussions about the waxing and waning of globalization over the long term. Here’s mine.

Phases in globalization.

Globalization is driven by arbitrage. When relative prices differ across locations, somebody can make money arbitraging that different. The result is trade. After all, trade happens when something is made in one country and bought in another. Given the delays, cost, and risks involved in hauling goods over long distances, we can conclude that someone is making money from the hauling. The only way to make money in this situation is to buy low and sell high and that, my dear readers, is the definition of arbitrage.

Up until the Information and Communication Technology (ICT) revolution of the late 1980s and early 1990s, arbitrage happened mostly in goods. In my 2006 paper, “Globalization: The Great Unbundling(s)”, this is referred to as globalization’s 1st unbundling, i.e. the geographic unbundling of production and consumption, and the rise of trade that this unbundling makes necessary. This is shown in the chart below.

This ‘unbundling’ approach to the drivers of globalization points to a simple periodization of the trade to GDP number. The first was mostly about goods crossing borders. This was from 1820-1990 and driven by improvements in transportation technology and spreading industrialization in the pre-WWII period. These drivers were joined by global trade liberalization in the post-war period. The second unbundling was also about firm-specific manufacturing knowhow crossing borders—that’s why it had such a radically different impact on the global economy. In my view, the fact that the arbitrage involved G7 manufacturing firms leveraging their knowledge with low cost labor is why the Great Divergence switched to the Great Convergence.

In my 2016 book, The Great Convergence, I break the first unbundling (1820-1990) into the three acts of a classic Greek tragedy. Here is the section from Baldwin (2016):

“One of the greatest dramas in human history happened [from 1820-1990]. Since civilization first saw daybreak, the consumption/production clusters in Asia presided over world affairs in every sense of the word. … By the end of Phase Three [1820-1990], all this had changed.

… The world-changing spectacle can be described as a three-act play: the ‘Setup’ in Act I, the ‘Confrontation’ in Act II, and the ‘Resolution’ in Act III.

• The ‘Set-up’ in Act I introduces the viewing public to the ‘hero’ (falling trade costs) and the other main characters (trade, industrialization, urbanization and growth).

Act I lasted from 1820 to 1913.

• The ‘confrontation’, which comes in Act II as the classic rules of drama tell us it should, sees the hero faced with daunting setbacks that leaves theatregoers wondering whether globalization is doomed.

Act II, which stretched from 1914 to 1945, lashes the hero with two world wars and the Great Depression. Audiences gasp as protectionism raises its ugly head and war forces a re-bundling of production and consumption.

• The ‘resolution’ comes in Act III when the trade-cost hero regains his aplomb and triumphs over adversity.

From 1950 to 1990, trade costs were reduced by trade liberalization and innovations in transport technology.”

The figure below shows world real trade costs and trade volume from 1745 to 1990. Trade costs, shown in the left panel, and trade volumes in the right panel, both suggest a very clear three-way partition. Trade rose rapidly up to WWI spurred on by the extraordinary reductions in barriers to trade that stemmed from the Steam Revolution and Pax Britannica. Income growth is also a powerful pro-trade stimulus, so the growth take-offs that accompanied the Industrial Revolution in Europe, Japan and European offshoots like the US were also responsible for much of the trade bonanza. After a pause between the world wars, trade volumes continued their ascent after 1950 or so.

Globalization’s second unbundling.

Globalization accelerated again from around 1990 when the ICT Revolution radically lowered the cost of moving ideas. Globalization’s 2nd unbundling – the geographic separation of manufacturing stages of production – became feasible when the ICT Revolution made it possible to organise complex activities at distance. Once feasible, the North-South wage gap that had arisen during the 1st unbundling made such offshoring profitable.

Just as nature abhors a vacuum, economies abhor imbalances. The easier movement of ideas thus triggered massive, North-to-South flows of knowhow and these new knowledge flows refigured the world economy. This new-style globalization – where high-tech moves to low-wage labor – turned the 1st unbundling trends on their heads. It de-industrialized the North while it industrializes the South. North growth slowed as Southern growth accelerated. In short, it produced the title of my book, the Great Convergence.

Importantly, the knowledge that is moving belongs to G7 firms, so the new North-to-South knowledge movements should not be thought of as some enormous ‘kumbaya moment’. Rich nations have not all of a sudden started sending their knowhow to poor nations in a burst of ‘caring and sharing’. G7 firms have worked hard to ensure that they profit from the new, ICT-enabled possibilities. As a result, the 21st century contours of knowledge are increasingly defined by the geography of the ‘global value chains’ (GVCs) that are arranged by G7 firms rather than the geography of nations.

This trend was curiously concentrated in a handful of developing nations, with China in the vanguard as I have shown in several recent posts, such as The Chinese globalisation paradox: Resolution in 8 charts.

The “three cascading constraints” view of globalization (or 3CC view for short) argues that this outcome was due to the cost of moving people, not goods or ideas. Airplane fares have fallen but the time-cost of travel has continued to rise with the salaries of managers and technicians. Since it is still expensive to move people – and international production networks still need people to move among facilities – most of this new-style manufacturing is going on in nations that are close to the G7 industrial powerhouses, especially Germany, Japan, and the US. India is an exception, but this is because India has engaged in international production networks primarily via services where face-to-face is less of an issue.

While the industrialization impact of the 2nd unbundling was hyper-concentrated, the Great Convergence is a much broader phenomenon due to knock-on effects of the rapid industrialization of the I6 nations. About half of humans live in the I6, so their rapid income growth triggered a booming demand for raw materials and this, in turn, triggered the ‘commodity super-cycle’ that sparked growth-take offs in many commodity exporting nations. This includes lucky developed nations like Norway and Australia, but most commodity exporter are developing nations, so the 2nd unbundling produced excellent growth in many developing nations who were untouched directly by international production sharing.

Summary and Concluding remarks.

?This post is mostly about eliciting help in finding the longest possible data for the global openness ratio. As a second priority, it would be great to get pointers to long history data on the openness ratio for individual nations, especially the UK.

And that’s it for today’s Factful Friday!

References

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