Technology could unwind trend in trade
A decade-long relationship between trade flows and trade partners’ GDP growth has been broken in emerging market Asia, but not in developed markets.
TWO OF the biggest forces influencing global economic activity over the past three decades- globalisation and automation-have had polaropposite effects on workers in emerging markets.
The former pushed multinationals to move production to countries with cheaper labou r costs than advanced economies, while the latter effectively substitutes capital for labour in the production process.
In a note to clients, analysts at the Goldman Sachs led by Senior Asia Economist Goohoon Kwon discuss how these trends have affected the global trade picture.
To the extent that robots become a less expensive input than labour in the production process, multi-nationals will be encouraged to “onshore” output to move it closer to their customer bases. This would mark an unwind of the long- standing trade formula, which had the growth of global supply chains at its heart, and it is a net negative for global trade that would have far-reaching consequences.
There are nascent signs that this process may be in the works, as emerging market nations in Asia have seen export volumes nose- dive despite continued growth among their major trading partners.
“A decade-long relationship between trade flows and trade partners’ GDP growth has been broken in emerging market Asia, but not in developed markets,”
Goohoon Kwon , Goldman Sachs Senior Asia Economist
the analysts wrote. “Asian exports used to grow two to three times faster than the real GDP growth of trade partners but this relationship has substantially changed in recent years
While China’s economic rebalancing likely plays a key role in explaining this breakdown, the economists hypothesise that the implementation of new technologies in the production process may also be partially to blame.
“Even if not, the impact of new technologies is still worth exploring since the impact could emerge gradually, potentially weighing further on global trade in coming years,” the team adds.
And the downward trend of foreign direct investment to emerging markets as a share of GDP suggests that this softness in trade will linger, as these inflows tend to lead exports by one to two years, according to Goldman.
Conversely, foreign direct investment to advanced economies, as a share of GDP, has remained resilient.
“While much of the variation in foreign direct investment could reflect cyclical forces, the two forces could be reinforcing, with cyclical factors releasing latent pressure from new technologies to substitute developed market capital for emerging market labour,” they wrote.
The push- and-pull of globalisation vs. automation has implications far beyond trade, potentially influencing everything from inequality both within and between countries, to development models, to interest rates.
In as much as the increased adoption of technology in the production process fosters onshoring, it is disproportionally negative for emerging market economies.
Goldman, for its part, notes that Asian countries tend to score relatively high on measures of innovation, suggesting that these nations might be able to incorporate these new technologies effectively and thus be spared extensive damage.
To the extent that labour is replaced by technology, this would presumably be a net negative for inequality within a country.
On the other hand, the key circumstance that would give rise to the increased use of technology is a rise in the price of labour relative to capitalwhich would likely be associated with a drop in this flavour of income inequality. — WP-Bloomberg