Home .International Trade The new globalization and the great unbundlings
The new globalization and the great unbundlings
Thursday, 16 October 2008 10:13

According to Richard Baldwin, over the past two decades we have moved into a new era of globalization through the “second unbundling”  as factory production processes (the supply chain) have been sliced up with many stages now being outsourced overseas, that is, offshoring.

(see -- http://www.unescochair.ns.ac.yu/sr/docs/baldwin2006Globalisation.pdf ).

But let’s step back a bit, and tell the full story.  In the middle of the 18th century, apart from a few cities, the whole world was basically poor and agrarian.  Since the cost of transport was prohibitive, each village’s consumption was supplied by its own production.  In other words, consumption was geographically bundled with its production.  Economies of scale could not be realized. 

But, then the cost of moving goods, people and ideas declined thanks to the introduction of steamships, inland water transport, railroads and the telegraph.  So it became more profitable for production and workers to shift to large regions and cluster to exploit economies of scale.  Factories could be located far from consumers.  This was the first unbundling, the geographical separation of production and consumption of goods.  And so the spatial pattern of development became that of large and small regions co-existing. 

It also lead to the industrialization of northern countries (Western Europe and the US) and the deindustrialisation of southern countries (especially China and India).  England became the world’s workshop providing cheap and varied manufactured goods in exchange for raw materials from southern countries.  This stimulated a growth take-off in northern countries as  they enjoyed a spatial clustering of innovation, technological progress and growth. 

The second unbundling started in the mid-1980s thanks to rapidly falling transport, communication and co-ordination costs.  Whole production cycles or supply chains, which were previously bundled together in one enterprise were broken up or unbundled.  The value chain was fragmented or sliced up.  Product design, component manufacture, assembly and marketing are now increasingly handled by different enterprises, often in different countries – and no longer under one roof at one enterprise which used to be black-box bundles of tasks.  Traditional international trade theory which was centred on finished goods, now it has to think in terms of tasks.

This unbundling started between the US and Mexico through the Maquiladora programme with emergenece of ‘twin plants’, one on the US side of the border and one on the Mexican side.  It then spread to East Asia where Japanese enterprises offshored labour-intensive production tasks to nearby East Asian nations.  Distances were short compared with wage differences.  It started with triangular trade as Japanese firms produced hi-tech parts and then shipped them to factories in East Asia for labour intensive stages of production and assembly, and then shipped them back to Western markets or Japan.  As China opened up to the world economy, Taiwan, Korea, Singapore and Hong Kong followed the same offshoring model.  A consequence was that southern countries industrialized and northern countries de-industrialized.

As individual tasks are offshored, globalization is harming some workers and helping others in the same enterprise.  A large number of lower skilled tasks are being offshored.  But certain high skilled tasks are also offshored, while other lower skilled tasks may not be offshoreable.  It is much easier to offshore a financial analyst’s job than a shop assistant’s job. International competition increasingly plays itself out at the level of tasks within firms, rather than between firms and goods.       

Globalization’s impact is now harder to predict.  Governments will need to be cautious when trying to pick winners.  It is not clear that we should be pushing workers to knowledge economy jobs per se, as many will be offshorable.  It may be more important for workers to learn how to learn, rather than learning any particular set of skills.  The workforce needs to be flexible and able to cope with nonroutine tasks and occupational change.  Some tasks that were previously non-tradable have become tradable.  Rapid advances in information technology and plummeting costs of communication have radically reduced the cost of trading some tasks but not others.    

Old paradigm globalization is still with us, that is, the first unbundling.  The value chain has not been sliced up in every industry, and international competition still continues at the firm level.  But globalization is being driven by a steady reduction in the cost of moving goods, people, capital and ideas – a trend that is still continuing.  Globalization can be thought of as the unbundling of things, and there is certainly a lot more on the way!  It has been estimated that up to 20 per cent of the US workforce is offshorable, and the offshoring of services has only just begun. 

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