The two numbers mentioned in this column seem to have completely different descriptions of globalization.
In the past 15 years, people have gradually formed a consensus that globalization is at its end and is on the decline. A widely cited figure supporting this argument is that the proportion of trade to global output peaked at the peak of the 2008 global financial crisis and has never recovered since then.
However, a new indicator proposed by two young economists, Sharat Ganapati from Georgetown University and Woan Foong Wong from the University of Oregon, depicts the opposite situation: more goods are being shipped farther away than before.
If globalization truly undergoes a reversal, it seems impossible for the new indicators to reflect this situation. So, which statement is correct?
Standard number
The importance of trade is usually measured by the ratio of the dollar value of all imports and exports to the total global GDP. According to data from the World Bank, this proportion increased from 38% in 1990 to 61% in 2008.
That was the golden age of internationalism. The collapse of communism and the collapse of the Soviet Union in 1991 opened up new areas for trade. The World Trade Organization was established in 1995. In 2001, China joined the World Trade Organization, and as a result, the world's most populous country fully entered the era of globalization.
The global financial crisis broke out in 2007-09, and the global economy fell into recession. People began to question whether globalization should have been implemented in the first place.
A new index
Economists use the dollar value of imports and exports to measure trade, while those engaged in transportation work tend to prefer ton-kilometers, which is the total mileage of freight multiplied by the total weight. This statistical unit equates the transportation of 20 kilometers of five tons of goods to 50 kilometers of two tons of goods, or 100 times that of one kilometer of one ton of goods. The U.S. Bureau of Transportation Statistics uses ton-kilometers to compare air, train, and truck freight.
A shipping industry executive told Ganapati that this statistical unit reflects "our transportation volume and transportation distance. It includes information on both aspects".
In a paper published this summer, Ganapati and Wong calculated the ton-kilometer index of the global trading system. They found that although the proportion of global trade to GDP reached its peak in 2008, the tonnage per kilometer of trade freight reached 82 trillion in 2020, a 49% increase from 55 trillion in 2008. Between 2008 and 2019, the growth of this number was 18% higher than the global inflation adjusted GDP growth rate.
Resolve relevant paradoxes
If the tonnage and distance of trade freight increase, how can the trade volume decrease? It is obvious that this situation occurs when the price per ton of transported goods is decreasing. If the price per ton of transported goods is decreasing, or if the trade mix is shifting towards lower cost per ton items such as raw materials or some combination, the above situation may also occur.
Both of these situations seem to be happening.
Taking lithium as an example, as a key material for automotive and electronic device batteries, its importance is increasing day by day. The price of one ton of lithium carbonate is $22000, while the value of one ton of iPhones (approximately 2000 units) can reach millions of dollars. The company can move the factory closer to the customer to reduce ton-kilometers, but cannot move the lithium mine.
When people imagine global trade, they may think of 40 foot containers stacked like Lego blocks on container ships. But in the global shipping fleet, only 13% of ships are only container ships loaded into consumer goods, which have the highest prices per ton. By tonnage, over 75% of the global fleet carries bulk goods such as agricultural products, natural resources, or refined oil.
Reflection on globalization
Other economists have also pointed out that globalization has not regressed as implied by the familiar ratio of trade to GDP. Richard Baldwin, a professor of international economics at the IMD Business School in Lausanne, Switzerland, argues in a series of articles that "globalization at its peak" has been exaggerated.
He pointed out that the important reason for the peak trade volume in 2008 was the extremely high prices of raw materials that year. During the global financial crisis, prices fell, leading to a sharp drop in trade volume. But the trade volume of raw materials continues to rise.
International trade in services such as cross-border financial services, telecommunications, or intellectual property, although difficult to measure, is also continuing to grow.
This makes people increasingly feel that globalization may not be as lifeless as we imagine.
Douglas Irwin, a trade historian at Dartmouth College, said, "I wouldn't say that worrying about the fate of globalization and whether it will collapse is unreasonable.".
Ganapati said that even if trade volume decreases, we should still pay attention to the growth of trade volume at a greater distance, as this indicates that the world still relies on global trade. He said that these distances also indicate the risk of supply chain disruptions.
He said, "There was a time when we were worried about where our iPhone came from. What really matters now is these raw materials, not the iPhone itself, but all the lithium, titanium, steel, and oil that need to be transported globally