Non-trade

Though it has been somewhat diminished as a subject of public discourse today, I think it's fair to say that one of the major economic buzzwords of our short lives was and is globalization. Thanks to a peculiar stripe of triumphalist capitalism which followed the collapse of the Soviet Union, we've all, I think, been regularly assaulted with the notion that there is a strict dualism in international trade, and that, in true dualistic fashion, only one side is right. Either a strong protectionist paradigm dominates, in which case native industry is encouraged to develop by tariffs and other barriers to entry into domestic markets (see Japan, Germany, South Korea, Taiwan, etc.), or else the gates are thrown wide open and foreign manufacturers with productive advantage are allowed to sell their goods at a better price, thus driving costs down relative to wages and increasing purchasing power (see, uh... well, I can't think of anywhere that this has actually worked out).

I hope I'm not being too obvious when I say that this model is grossly oversimplified. McGill graduate and professional essayist John Ralston Saul--hey Canadians, you know this guy?--has a book which helps add some complexity to the picture. It's called 'The Collapse of Globalism', so right off the bat you know he's gotta be good pals with the fellows at the Cato Institute. His question is pretty simple: why, if we spent three decades torching internal and external regulatory regimes, have we not seen a dramatic fall in unemployment and a rise in personal incomes? Those, by the way, are two of the results predicted by Neo-Liberals; markets can made more efficient domestically by eliminating distortions to the determinants of supply and demand, distortions such as taxes and subsidies, but by expanding the number of actors within them through globalization, that efficiency can be incomparably increased. As each nation enters the global market, it specializes in producing that for which it has a comparative advantage (comparative advantage is achieved when the opportunity cost of producing good X is less in terms of good Y for one country than it is for any other), thereby maximizing global productive efficiency. Employment will be correspondingly maximized by this efficiency in production, and goods will be available at the lowest possible cost in all domestic markets.

Saul's theory is that globalism, or globalization, today has been misapprehended because of a reliance on the theoretical fiat of country-to-country trade. In order for gains from trade to be captured as described above, trade must be truly international--there must be at least two independent international actors to enter into a trading relationship, or else the very idea of competition is neutralized. But as Saul very astutely describes, an enormous portion of trade is not international at all, despite being formally recorded as a cross-border flow of goods and capital. As of 1997 (the last time any aggregates were made of this data, apparently), 77% of US trade was either intra-firm or so called 'arm's-length'--between multinationals. 60% of global trade in 2008 was completely internal to multinationals. Industry concentration in these markets is high and, until the financial crisis, was steadily growing; the value of cross-border mergers and acquisitions, along with FDI more generally, peaked in mid-2007, before rapidly declining in the wake of the financial crisis. I wouldn't doubt that the current sluggishness of capital markets will dampen the value of cross-border M&As for some time to come, but the fact remains that, with a pre-crisis value of $3.7 trillion (equal, for the first time in history, to the value of intra-border M&As), a remarkable degree of industrial concentration has already been achieved (helped, in part, by powerful private and public pools of capital playing the Gekko hand).

The question is whether this process should be counted as trade at all. If the same entity, in a legal and economic sense, purchases the goods and owns both the transport and the distributors, does it matter that the locations of each of these stages will net you an oh-so-colorful-and-ethnic stamp in your passport? If one body is responsible for it all, then the same opportunity cost applies (in theory) across all of its organs. What is comparative advantage under these circumstances?

I ought also to point out that this is almost a non-issue in economic literature at this point. The weight of information on the subject, as even a simple Google search will point out, is ten years out of date. The flurry of papers on M&As in the late 90's occurred in response to the first great orgy of cross-border togetherness, and was a natural subset of the larger globalization debate. Since moving on to climate change and little kids in hot-air balloons, there's been no similar scrutiny of the second round, which began in 2004 and lasted until the champagne ran out on Bond Street. It's another marker of the complacency of the economics discipline in this, our latest Gilded Age.

What makes this subject particularly difficult to approach is that we have a conceptual framework of international activity wholly unsuited to the task. It's difficult to predict what the impact of internalizing cross-border flows of goods will be on domestic economic indicators when we still make rather incoherent distinctions as, say, with the terms 'international' and 'domestic'. This is a meaningless binary, given the circumstances. What's needed is the development of a model which respects above all else the immediate legal status of the owners of capital, and not their arbitrary geographic location. Geography is only important in determining the endpoints of trading lines, as well as the stops that are made by good X as it travels from the point of production to that of consumption.

It's a geometry of trade that I'm really thinking of: each point on the map can be identified by its economic activity (Is it a manufacturing plant, retailer, or private equity fund?), its relationship to other MNCs (Is it a wholly-owned subsidiary or an international headquarters?), and the gross value of its output (What kind of market power does it have?). This is, of course, only a very crude idea of what I'm proposing. Ultimately, this model is meant to properly visualize the influence of economic actors as truly international entities: in other words, by connecting the chains of investment, production, transport and consumption, and revealing the degree of vertical integration between them, one could really assess the value of the state-system paradigm and understand better trends in economic--as well as political and social--data that up to now have not respected our assumptions. Maybe then we'd get a better picture of the structure of our economic lives, and the rather poor social outcomes that thusfar have resulted from what was supposed to be the miracle of liberalization.

Or maybe macro's got it covered, and I'm just some shmuck what got fancy ideas. I'll admit, I ain't no Mankiw.