Trump and New Globalization
Illustration: Didie SW
United States Vice President Mike Pence visited Indonesia recently. Among results of his meeting with President Jokowi was agreement on bilateral trade and investment arrangements based on mutual benefits (win-win solution).
However, the US has vowed protectionism under President Donald Trump in regard to international trade arrangements.
The unfair trade deficit and globalization have been considered the cause of unemployment for various types of jobs and sectors, stagnant incomes of the middle-income bracket over the last 20 years, and all of them are disadvantageous for the US. Therefore, the current US approach is how to reduce the huge and unfair trade deficits of goods and prevent US companies from investing overseas, which provide jobs to workers in other countries (offshoring).
The trade balance of services where the US has a surplus is not discussed much, and so is the competitiveness gained from US firms through offshoring. An executive order (EO) issued in late March will investigate 16 countries where the US has trade deficits in goods, including Indonesia at 15th place and is planned to impose restrictions on imports to deal with unfair trade. Currently, several Indonesian products, such as paper, shrimp and steel plates have been subject to anti-dumping and countervailing duties, and there are petitions against Indonesia\'s biodiesel. Meanwhile, Indonesia does not have any case against the US.
The focus of the US fair trade approach is in fact contradictory to the ongoing globalization processing and new globalization that will be quicker among us, where the trade of services and movement of knowledge become inevitable. Precisely, the fair trade policy that will be carried out will not result in a win-win solution, especially in the context of new globalization, and will even harm the US.
Globalization, technology revolution and ”new globalization”
Since the idea of globalization gained popularity in the early 1980s, discussion on the global process had never stopped. However, it seems that understanding of globalization still has to be constantly updated. It is proven that we are still shocked by the Brexit phenomenon and President Trump with his anti-globalization rhetoric became the choice of the US people.
In his book, The Great Convergence: Information Technology and the New Globalization, Richard Baldwin believes that in order to understand the implications of the ongoing globalization process, we have to look at it as part of the process that has taken place four thousands of years ago when humans started production and trade activities.
Baldwin -- giving a public lecture at Panglaykim Memorial Lecture at CSIS, Jakarta, May 2, 2017 -- divides the history of economic production and trade to this day into three periods. The first period is when production and consumption has to be in a place where trade is very limited due to high costs of transportation. The second period is the first wave of globalization marked by the rising trade of goods since the 19th century because of the technological revolution, which is capable of reducing production costs and transportation with the steam engine discoveries.
Production, knowledge and innovation remain in countries that ultimately become "advanced" countries through industrialization and rapid rise of incomes, which causes imbalance between "developed" and developing countries. Others that are unbeatable are unskilled workers who cannot compete with mass production. However, many other parties benefit from the emergence of skilled workers, the growing specialization of skills, innovation and productivity, and consumers who can consume products that are not made in their country.
The third period occurs when trade is increasingly dominated by a flow of idea exchange, knowledge and services, which are part of the second wave of globalization. Here, trading is no longer about goods, but rather in the form of work and parts of the production process carried out offshore or in other countries because of lower labor costs. The second globalization since 1970s was made possible because of the development of information and communication technology that facilitated the exchange of knowledge and information, and the coordination of the complicated global value chain and located in various places.
In the second wave of globalization, those which are unbeaten are workers who previously got benefits, especially those in advanced countries. With the advancement of information technology, not only goods but also jobs can be sent abroad, especially to developing countries. Since the cost of sending people with knowledge is still relatively expensive, there is also concentration of the global value chain sections only in several countries and mostly in East Asia.
Indonesia\'s participation in GVC is not as high as in China or several ASEAN countries, but Indonesia still benefits from the commodity demand due to rapid growth in East Asia. There has been an increase in workers and rise of the middle-income segment in countries that grow due to the offshore productions and experience acceleration of industrialization process and high growth rate (about 80 percent over the last 20 years).
What is the story in advanced countries? Groups that lose jobs due to offshoring and middle-and lower-income groups whose incomes have been stagnant over the last 20 years are those who feel disadvantaged by globalization. They are targets that will be given "justice" by Trump\'s policy approach, even though actually 80 percent of the explanation of unemployment at the unskilled level and labor intensive is caused by technological changes (such as automation and robotics) and only 20 percent by competition through trade agreements.
The source of knowledge and innovation remains in developed countries, and their owners experienced a large income increase or about 70 percent within the last 20 years. Therefore, there is the inequality of incomes in the US. With the second wave of globalization, there is also a "convergence" of incomes between the developed and developing countries (even though not all developing countries).
The future of globalization
Globalization will continue, but with a different face. Baldwin and many others predict the world will enter the third wave of globalization with the next technological revolution. Digitalization and technology will change the way production of goods and services (eg 3-D printing, robotics) and how we trade goods and services (such as e-commerce). The cost of "presenting people" becomes cheaper because there is no need for physical movement. Just like the cheap delivery of goods and knowledge has boosted the globalization of the first and second waves, the new globalization will be faster, more abrupt, and more uncertain. The implications to the world economic condition will also be massive.
Today most of us still understand globalization like in the first wave in the 20th century. Various socioeconomic policies are still based on the old understanding. As a result we are all surprised when their implications are far from what is expected, and various policies made to reduce negative impacts are not effective. In fact, there is a new paradigm of the globalization process, which means that socio-economic policy making must also change.
The wave of globalization competition occurring among workers, especially amid lower costs in developing countries. However, knowledge and innovation, skilled and intensive work of science, remains in the advanced countries and companies or the owners of science can still benefit by producing competing products at lower costs because the possibility of offshoring and re-importing to the US -- to become final products with high value parts such as research, development and innovation, and intellectual property rights and permanent brands -- remains in the US.
By understanding globalization, which has been and will continue to happen, even if imports are limited by the current Trump approach, what will be disadvantaged are exports because imports will be more expensive -- the competitiveness of US exports will be affected. Moreover, costs of related products will be more expensive for consumers. And if production, parts of which can be carried out offshore, is taken back or prevented from going out, what will not occur is not the creation of job opportunities because the relocated works are labor intensive and routine. Mostly likely what will happen is the use of machines or robots to replace offshoring.
So blaming other countries for being unfair and rejecting existing trade agreements to reject unjust new globalization will harm the US and does not create job opportunities as expected.
The win-win solution is globalization and there will be those who will see losses or profits in the flow of trade, investment, capital, knowledge and people, and the important thing is to design programs that can overcome the losses -- not rejecting new globalization. Programs such as retraining, teaching skills more in line with new globalization, giving support for entrepreneurship and other support that directly helps affected individuals will be more appropriate. Not protection of the sector or certain types of work.
Indeed the political reality and budget limitations that frequently result is something different, and the instruments of old globalization such import duties and obstacles are considered to be the easiest to implement. However, the results are disadvantageous. This is the lose-lose solution, which must be avoided. May the US and Trump be aware of this, and we in Indonesia also are heeding and anticipating the dynamics of the new globalization.
MARI PANGESTU
International Economic Professor of Economic and Business School of University of Indonesia
