This chapter presents an overview of a paradigm of globalization that has dominated public discourse in the past thirty years and shaped trade and development policies worldwide, and discusses how that paradigm is now changing due to new technologies such as ecommerce, 3D printing, robotics, blockchain, and artificial intelligence. The chapter asserts that this new paradigm of globalization can be more dynamic and inclusive than any wave of globalization preceding it, if trade and economic policies are adjusted to fuel it.
This chapter asserts that global production is on the verge of its third inflection point since World War II. In this new system of production, the world economy goes to heaven: supply chains run in the cloud. Trade is less about the flow of physical goods across borders and more about the flow of bits: digital goods, designs, and data. The driver of trade in the Flat World—imports of parts and components from around the world for assembly into iPhones, BMWs, and Sony TVs in China or Mexico or Poland—is no more: trade in intermediate products is yielding to 3D-printable products printed right where they are assembled into final products. In the coming era of global making, there is no need for trade to bring intermediate products to assemblers.
This chapter argues that it is becoming possible for even the smallest businesses, once setting up shop on major global ecommerce platforms, to gain customers from around the world. This is transforming the long-held conventional wisdom that small businesses cannot export because of high fixed costs for them to find global clients. Ecommerce is changing the face of world trade—and with it, companies' growth prospects and global economic geography. Survey data strongly suggest that online sellers are likelier to export and grow faster than offline sellers and thus hypothetically also likelier to create new jobs, but whether that is correlation or causality is still not clear—it may well be that high-growing firms self-select into becoming online sellers.
According to the network company Ericsson, there were 2.6 billion smartphone subscriptions globally in 2015; by 2020, 6.1 billion people, or 70 percent of the global population, will have a smartphone and 90 percent of the planet will be in areas with mobile broadband network. The smartphone revolution unlocks mega-markets at the nexus of new-found connectivity and income growth. Soon anyone will be able to sell almost anything to almost anyone, any time: garage sales can be global. Previously run by giant retail chains, distribution channels now lead straight to individual consumers leveraging their smartphones, tablets, and laptops to buy, make, modify, and return goods and services made around the world. The smartphone revolution is also catalyzing cross-border trade in content—videos, music, books, and advertisements.
Sea-bound merchandise trade is bound to soar by 4.3 times between 2015 and 2050; assuming that trade coming and going through major U.S. ports grows at a rather moderate 5 percent a year, container flows will double between 2015 and 2030. The recent explosive growth in ecommerce has built a parcel mountain on top of the world's containers, pressuring customs and border agencies, postal systems, and busy urban centers. Burgeoning trade flows are a double-edged sword—trade is a fabulous source of growth for economies, businesses, and trade intermediaries from shipping lines to express shippers, banks, freight forwarders, warehouses, and more. But trade growth needs to be matched by investments in new capacity in ports, shipping, freight-forwarding, last mile delivery, and other industries.
Cross-border trade finance transactions remain paper-based and manual—and thus highly inefficient, slow, and susceptible to fraud, and also time- and labor-intensive to manage. Increasingly complex financial regulations add to a bank's already high costs of preparing the documentation for any one transaction, and incentivize banks to deal with larger companies that offer bigger deals and are a known commodity. In small transactions, banks' fixed fees for international wires and foreign exchange rate management quickly whittle away profits. As a result, the world is facing a $1.7 trillion pent-up demand for trade finance.
We are verging on an era of mass diffusion of a technological feat: cognitive computing. Artificial intelligence makes companies better at optimizing, matching, and predicting, to a good extent without much human involvement. And it enables the extraction of information from data that are messy and unstructured and the recognition of patterns in it. It is powered by the stunning growth of qualitative and quantitative data inside and outside enterprises—33 times more than in 2008. In 2019, global Internet traffic is equivalent to 142 million people streaming Internet HD video simultaneously, all day, every day. Increase in data and computing power are rapidly disrupting world trade. Companies are far better placed than just ten years ago to spot new international markets and micromarkets, target and market to foreign customers, orchestrate their global operations, and manage their global supply chains—including to forecast and avert the next tornado or tsunami.
In 1994, the United Nations launched a global drive to bridge "digital divides" between developed and developing countries. Over twenty years later, digital divides are digital chasms. While 90 percent of Germans and Swiss are online, in sub-Saharan Africa, only twenty out of a hundred people were netizens in 2016; in developing Asia-Pacific, only 49 percent; and in Latin America 56 percent. Of companies, it is the larger, urban, productive, and export-driven businesses that tend to have digital capabilities and transact online; many rural small businesses do not even have an Internet connection. Companies and consumers that have Internet connection face another challenge to transacting online: gaps in online payments. The risk is that widening digital divides between advanced nations and developing countries could only widen their income gap, leaving developing countries to forever play catch-up—including in the digitizing world trading system.
Trade costs, the various costs of moving cargo from one part of the Earth to another, have dropped precipitously over the past two hundred years, contributing, with trade liberalization, trade agreements, and economic growth, to the 6 percent annual growth of world trade in the second half of the twentieth century. Policy has played a major role in cutting trade costs. But still today, numerous countries' customs are bottlenecks of world trade that delay shipments and cost companies money. Worse, hungry for revenue, hounded by protectionist lobbies, and worried about national security, governments are setting up a new obstacle course for businesses to navigate. The obstacles are familiar enemies of trade: fears of terrorism, sprawling taxes, and stagnant transport. Their resurgence can make or break the future of ecommerce, the hallmark of twenty-first-century trade that promises particularly great gains from small businesses around the world.
Unrivalled after the fall of the Berlin Wall, free market ideology forced a wave of privatizations around the world, transforming governments from managers of economies into regulators of markets. Today's global digital economy has no unifying ideology or policy framework like the one that made countries march in the same direction in the 1990s. It has no common, enforceable rules that would give certainty to businesses operating across borders. It does not even have a common set of norms everyone would roughly adhere to. Instead, countries around the world are fashioning and implementing their own digital regulations in such areas as data privacy and transfer, Internet intermediary liability rules, and taxes on digital sales. What many have called "digital protectionism" seems to be on the rise.
Few obstacles are as thorny for small businesses trying to ride on new technologies to scale in world markets as lack of finance. Survey after survey show that capital is the number one challenge to small businesses and a top-three challenge to mid-size companies looking to grow their businesses and export; the challenges are particularly acute in Africa and developing Asia. While online lending and crowdfunding have significantly opened small businesses' access to capital, there are several policy challenges that obstruct the diffusion and use of these technologies. Small businesses have also themselves to blame for their lack of access to finance, such as limited understanding of how banks and investors view the world and assess risk.
There are several challenges to the twenty-first century's technology-powered trade, such as digital divides, arcane customs procedures, and stringent data transfer rules. But no challenge is as difficult to solve as fears about the impacts of trade and technology on jobs, incomes, and equality. These fears have power—they helped produce Brexit and the election of Donald Trump. Paradoxically, while unlocking unprecedented opportunities and value creation in countries around the world, the twin forces of technology and trade are more often feared to cause unemployment and inequality than celebrated as sources of opportunity. For developing countries interested in building their own tech ecosystems, these fears are compounded by concerns about the dominant role of U.S. and Chinese tech companies and presumed "winner take all" dynamics in technology sectors.
Productivity growth that drives income growth has been sagging around the world over the past decade. No one knows exactly what is causing it. The past few chapters have discussed a number of bottlenecks for firms trying to take better advantage of technologies to advance their trade—regulatory uncertainty, digital divides, costs and complexities of cross-border payments and logistics, arcane customs procedures, and so on. All these areas can be improved with new policies. This chapter lays out an ambitious and wide-ranging policy roadmap for countries to make emerging technologies work for their trade and revive their productivity.