The great unbundling

GLOBALISATION is a big word but an old idea, most economists will say, with a jaded air. The phenomenon has kept the profession's number-crunchers busy, counting the spoils and how they are divided. But it has left the blackboard theorists with relatively little to do. They are confident their traditional models of trade can handle it, even in its latest manifestations. For example, Greg Mankiw, of Harvard University, has concluded that “services offshoring fits comfortably within the intellectual framework of comparative advantage built on the insights of Adam Smith and David Ricardo.”

Ricardo illustrated his insights with the example of Portuguese wine trading for English cloth. But some trade theorists think this metaphor will no longer do. Indeed, two of them—Gene Grossman and Esteban Rossi-Hansberg, of Princeton University—published a paper* last year subtitled “It's not wine for cloth anymore” (see “On the hiking trail”, August 31st 2006).

Ricardo, it seems, did only half the job. He described the first of two “great unbundlings”—as Richard Baldwin, of the Graduate Institute of International Studies in Geneva, has put it in a recent guide†. Trade in wine, cloth and other goods allows production to be distanced from consumption. Countries do not need to grow grapes to enjoy the fruit of the vine; thanks to trade, they can transform cloth into wine instead.

But in Ricardo's world, a country must still take care of all of the separate tasks required to finish the goods it makes. In a country of pinmakers, to take Adam Smith's seminal example, someone must still cut, draw and straighten the wire; fashion and affix the head; then whiten and sheath the finished product, if any pins are to be made at all.

In the second great unbundling, production is spliced and diced into separate fragments that can be spread around the globe. Pin-whitening is done in one country; wire-cutting in another. Some theorists call this the “vertical disintegration of production across borders”. Thankfully, Messrs Grossman and Rossi-Hansberg have a more felicitous phrase: “trade in tasks”.

As globalisation has advanced, it has become easier to move some of these tasks offshore. For the workers who once carried them out, this has three possible consequences, two bad, one good. Start with the good news. Offshoring makes firms more productive. The tasks that are best kept close to home remain onshore; other tasks can be taken care of in cheaper places abroad. Everyone benefits from this gain in productivity, including the workers who have fewer tasks to perform. For example, Japanese electronics companies continue to flourish in American markets precisely because they have moved their assembly lines to China.

The second potential consequence of offshoring might be called the “Lou Dobbs effect”, after America's most prominent television mercantilist. When some tasks are taken overseas, that leaves less work for patriotic Americans to do, right? Well, maybe. If a whole industry leaves America's shores, demand for labour will ebb, and wages will fall. But in less extreme cases, relieving workers of some of their tasks (wire-cutting for example), allows the domestic industry to expand—and a bigger industry might find room for the displaced wire-cutters, at the same wage, albeit on different tasks.

Offshoring, it is clear, enables companies to make more stuff. But this can be a mixed blessing. If the home industry makes too much, it will depress the price of its exports on world markets, damaging the country's terms of trade, and hurting workers. This result is sometimes called the “terms of trade effect”.

Messrs Grossman and Rossi-Hansberg describe this as a “new paradigm”, a phrase guaranteed to raise the hackles of more cautious scholars. Their model may not be quite that, but nor does it sit altogether comfortably within trade economists' established way of thinking. That tradition painted in bold strokes, and identified clear winners and losers from globalisation. Economists felt sure they could predict what would be traded and who would get hurt. As Mr Baldwin points out, they made pronouncements about entire “sectors” of the economy (heralding the dawn of some industries; the twilight of others) and whole classes of workers (the college-educated versus the rest) whose fortunes were tied to them.

A bundle of results

The new breed of models paint globalisation with a much finer brush. (It is high-resolution globalisation, Mr Baldwin says.) International competition plays out not just at the level of the industry, or even the firm, but right down at the level of individual tasks—assembly, packaging, data entry—that cut across whole sectors of the economy. Moreover, in a break with most traditional models, the new theories do not take the tradability of things as a given. For Messrs Grossman and Rossi-Hansberg, the ease of trading a particular task is a matter of degree not kind; and it is a variable, not a constant. Hence tasks that seem safe from foreign competition today may not be so tomorrow. Finally, the tradability of a task might bear no relation to the amount of skill it requires. As a result, the victims of globalisation are harder to identify and the salves harder to apply.

So is globalisation to blame for the rich world's recent anxieties or not? Unfortunately, the new theories of offshoring can deliver opposite verdicts depending on precisely how they are set up. As James Markusen, of the University of Colorado, mischievously puts it, “I am confident that I can concoct a model to generate any result desired by a reader with a deep pocketbook.” If only every worker were as versatile.

* “The Rise of Offshoring”

† “Globalisation: The Great Unbundling(s)”