The Economics of Globalization Backlash

Just finished my draft on the globalization backlash and the followings are the highlights:

The trade models (the Ricardian and Smithian) can help us understand both globalization and backlash;

The two trade models share the visions of putting global production before global trade, and set labors as the only factor of production;

The first insight means understanding global supply chains is the best way of understanding globalization;

The second hints at the unique value of labor economics;

Just like the Ricardian is embedded with opportunity costs, the Smithian is embedded with accounting costs, which provides unique insights into global economic divide (global North and South);

Based on symmetric opportunity costs, the Ricardian applies better to North-North exchanges, while based on asymmetric accounting costs, the Smithian works better for the North to South flow of production, in which the North – South wage gap provides the key driver for global production through supply chains;

The trade models have laid the foundation for a backlash model, next we need to move to the tradeoff of two labor efficiencies: productive and allocative;

Labors are always produced locally all over the places, but can now be allocated globally through global supply chains;

Societies all prefer employment over unemployment, as the former is a social good while the latter social bad;

Labor productive and allocative efficiencies can help as well as hurt each other, as we learned from the backlash;

Modeling labor allocative efficiency presents a bigger challenge than modeling productive efficiency:

Labor productive efficiency is a supply side issue, while modeling labor allocative efficiency at global scale becomes a challenge in general equilibrium (i.e., matching supply and demand);

We can always use labor hours required for one unit of good to measure productive efficiency, but no such straightforward measure exists for labor allocative efficiency at global level, as marginal global labor demand and marginal global labor supply are not the easiest to keep track, especially in the South;

Another complication comes from the fact that allocative efficiency, whether for goods or labors, depends on social preference;

To model tradeoff of labor efficiencies, I take three steps:

Using global divide to develop a model for two country groups of North and South;

Employing segmented, interior global PPF curves;

Shifting from static, population (or popularity) based Pareto efficiency to dynamic one, relying on changes of average employment rates — one before and another after globalization — within the North and South;

• This is the simplest 2 x 2 table of two country groups and two employment rates, but enough to meet the challenges we have here;

Focusing on changes of average employment rates also allows subjective perceptions to play a role in backlash;

Globalization can be broken down into three stages: Stage I prepares, Stage II the heyday of global production and Stage III the stage of backlash;

Stage III did not issue a death certificate to globalization, but mixes backlash with progresses;

Backlash occurs because of three things simultaneously: (1) unemployment is a social bad; (2) Employers in the North would not move employees to the South; (3) government did little to help workers reallocate;

We should not think of globalization as having equal power as backlash, because real value added gains are hard to ignore and even harder to reject by any country during negotiation.

An updated version from last night is attached below: