June 26, 2016
Jim Tankersley had an interesting piece arguing that the Brexit vote ended “globalization as we know it.” I am less optimistic on that front. The folks who profit from the current path of globalization are incredibly powerful and very effective at working around democracy and things like that. But that aside, the article had an interesting graph that caught my attention.
The graph shows the ratio of international trade in goods and services to GDP over the last two decades. After rising sharply from 1995 to 2007, it has been largely flat and still has not recovered to its 2007 peak. This change in trends is of course striking.
However, there is another aspect to this story worth considering. In the debate over the productivity slowdown, there is a camp which argues that it is largely illusory. The story goes that we are undercounting GDP, and therefore productivity, because we are missing the value of things like video downloads on the web, undercounting the value of the camera in our iPhones, and other such things.
While there is obviously some non-zero amount here (we are missing some things in our GDP accounting), I have never been convinced that it could be enough to change the basic story. (Remember it has to be cumulative. If we are undercounting by 0.5 percentage points annually, after 20 years we are undercounting GDP by 10 percent.)
But this connects to the trade story in an interesting way. The items that are likely to be missed in GDP accounts are also items that are heavily involved in trade. For example, people everywhere get information, music, and videos off the web. This means that if we are even undercounting GDP by a small amount, like 0.2 percentage points, we may be undercounting trade by a large amount.
In the 0.2 percentage point case, suppose that half of this is in items that cross national borders. This means that we are understating the growth of trade by 0.1 percentage points annually. Over the stretch of time covered by the graph, this would translate into 2.0 additional percentage points of world GDP involved in trade. In this story, it is very plausible that much of the drop in the trade to GDP ratio is a result of mis-measurement, even if the measurement problem is not a big deal from the standpoint of the world as a whole.
There is one other thing worth noting in this story. Suppose the protectionists get defeated and we find a way to finance innovation and creative work other than patent and copyright protection. In that case, drugs are all cheap and books, recorded music and video material all cross borders at zero cost. This explosion in globalization would be associated with a plunge in the trade to GDP ratios. This indicates that it may not be a very good measure of what we are interested in.
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