Globalization

From HeckscherOhlin to the New Economic Geography

F. Gerard Adams

Globalization is causing overwhelming change across the world economy. New patterns of trade and international specialization have been the road toward rapid economic development in East and South Asia. The pace of economic growth in these developing countries far outstrips growth in the First World. Countries that not so long ago had been primarily producers of agricultural products and raw materials, far out on the periphery, are today core producers of manufactures, themselves drawing heavily on the worlds supply of raw materials. Global trade has also been advantageous to advanced countries, supplying them with imports of low-cost manufactures, though at significant harm to their traditional industries. Losing much of their old industrial base, the United States, Europe, and Japan have, in turn, been refocusing their economies on high-tech and services. With the striking book title The World is Flat, Thomas Friedman (2005) describes these developments, presenting a widely fashionable view of this new world economy. Businesses are said to be competing on a level global playing field almost without regard to location or nationality.1 As barriers to international trade have diminished and as costs of transportation and communication have fallen, the geographic scope of markets has expanded. Trade has increased greatly and trade patterns have changed. This can be observed widely, as we have noted. But todays burgeoning trade and other international interactions, like capital movements and
F. Gerard Adams is Emeritus Professor of Economics at the University of Pennsylvania. The paper was started while the author was at the Hopkins-Nanjing Center, Nanjing, China.
1

In fairness to Friedman, it may not have been his intent to say that the world is literally flat or homogeneous. His analogy may be intended to refer simply to a wider competitive playing field. For an amusing yet serious speculation of what Friedman might have meant, see Leamer (2007).

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migration, are not taking place because the world has become flat. On the contrary, it can be argued that the current headlong pace of trade growth is a result of the massive cost and price differentials that remain between trading regions. Much of todays trade is the result of the very unflatness of the market, the huge gap that still persists in wages and living standards between advanced and developing countries. It has been customary to measure globalization in terms of international flows of trade and capital. As the trade increases, the world is said to become more globalized. It is well to remember that many of these flows are themselves the result of imbalances between different parts of the world. A convenient analogy is with the water in a pond. Suppose that a dike crosses the pond and that the level of water on one side is different from the level of the water on the other. Now, suppose the dike is breached. The water will pour from one side to the other until the level of water is equalized on both sides. Once that has occurred, the flow of water will cease or, if it continues, it must be justified on a different basis. An important distinction is, thus, between the process of globalization and its ultimate conclusion. While international flows may be increasing greatly during the process of globalization, these flows may represent a response to international disequilibria. Once globalization is complete, the basis for continued international flows may be very different from that which prevails while the globalization process is underway. Globalization of trade, migration, capital and information flows will eventually reduce the differentials in wages and technology between the old economies and the new. That will indeed be a flatter world. Space and specialization will remain. In the long run, the world seems bound to become more globalized, because opportunities have grown enormously. But this certainly does not mean the death of distance. Distance will always matter because we are physical beings located in a specific place (Wolf, 2004, p. 120). The economics of location, what is today called the new economic geography, (Fujita, Krugman, and Venables, 2001) suggests, even in the long run, a world of peaks and plains, an international economic spatial organization that will have a different basis from todays, one that may be more integrated than it is today but one that may continue to have important elements of diversity. This article seeks to examine the basis of globalization, today and tomorrow, and to link the ultimate outcome of globalization into the

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context of the new economic geography. First, we discuss the essentials of globalization as it is currently occurring. Then, we consider the basis for ongoing patterns of change, developments that are closely related to the changing role of the large developing economies in Asia. We summarize the relevant ideas of trade theory and of the new economic geography and their suggestions for the organization of world production and trade as world markets become more tightly linked.

Globalization: An ongoing process

Globalization is a process of market integration. Since World War II, and particularly since the mid-1970s, interactions between many parts of the world have expanded in scope and have accelerated greatly. The rapid growth of trade, and its changing structure and geographic range, have suggested to many observers that the ultimate global economy has arrived (Friedman, 2005). Yet, Globalization is not rampant. It remains remarkably limited (Wolf, 2004, p. 136). Some dimensions of the integration of the world economy date back many years and have reached an advanced stage but others are still at an early or intermediate stage, far from completion. Trade integration An historical view of trade provides some useful perspective: Economic historians will point out that the period before World War I (18501914) was a time of burgeoning trade and international capital flows (Maddison, 2001, and Dollar, 2005). The development of industry in Europe and the United States, and the invention of the steamship and railway, had made possible trade linkages between countries producing basic materials like foodstuffs, cotton, lumber, and iron ore and those specializing in manufacturing. That world can be described as colonial. The colonies supplied raw materials. In turn, manufactured goods found markets throughout the world. Capital from the core countries served to build the mines and transportation facilities required to exploit far away resources. (Today, one may want to replace the term colonial trade with a more politically correct term, like resource-based trade.) While traditional colonialism is at an end, trade between the suppliers of raw materials and

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energy and the consuming countries continues to be an essential part of world trade. The inter-War period represented a giant step backward away from globalization, back into a world of high tariffs and protectionism, each country seeking to promote its own narrow interests at the expense of its neighbors. The decline in trade and depression and unemployment (a cause or a consequence?) were disastrous. A tragic time! Fortunately, after World War II, wiser heads prevailed. There was a reversal, a return to the path of liberalization and growth of trade. The initial period, until the floating of the US dollar in 1971, was a time of recovery. Since then, barriers to trade have been further reduced, communication and logistics have improved, and trade has expanded at high rates, significantly faster than the growth of GDP. Worldwide merchandise trade has been increasing at more than 9% per year in value terms and at over 6% per year in terms of volume in the 19932006 period. Trade from some regions has been especially favored, for example, the volume of exports from Asia. In this connection the high growth of the counter flow of imports into Asia is also notable. Imports into North America and Latin America have also been increasing greatly. The composition of trade shows continuing flows of basic raw material inputs and energy, and change toward trade in ever more sophisticated manufactured goods like office equipment, a category that includes computers. Trade in traditional products of the developing world, like textiles and clothing, has been growing more slowly. Successive rounds of tariff reduction under GATT and WTO,2 have brought trade barriers on industrial goods down to comparatively low levels, particularly in the advanced countries, though trade-restricting practices are still frequently a cause for controversy3 and barriers to agricultural trade remain considerable. Declining transportation cost and improving logistics management have enabled firms to outsource their labor-intensive operations to low-wage countries, creating manufacturing supply chains in distant regions. Moreover, the improvement of technology has
2

The Uruguay round, concluded in 1994, was the eighth such negotiating round. The ninth round based at Doha has been tackling more complex issues related to agriculture, services, and intellectual property and has not yet been successfully concluded. 3 Recent disputes about import product quality and prices, resulting in calls to restrict imports and to impose countervailing duties on steel, are examples.

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meant that these countries have become competitive in a range of increasingly higher technology goods. In contrast to the increasing horizontal integration of world markets, from a vertical production process perspective, the geographic segmentation of production has increased. The stages of processing have frequently been separated and relocated to take advantage of labor cost differences between advanced and developing countries. The increasing international separation between manufacture and assembly is one factor that contributes to the more rapid growth of world trade than of world GDP (Irwin, 2005). Most recently, high speed electronic communications links are carrying service activities internationally. Broadband satellite communications and fiber optical cable systems make possible the instantaneous transmission of information services, worldwide. A growing share of international trading activity represents such servicesfinancial services, engineering, transportation, management, etc.and intellectual propertypatent rights, movies and music, pharmaceutical formulas, etc. Until recently the bulk of these movements had been low-skill service activitiescall centers and data entry. But, in recent years, we have also seen the creation of technology service centers in Asia, in Bangalore and Hyderabad, India, for example, where much software development for American and European firms is being carried out. It is well to remember, that, by their very nature, most service activities are not geographically mobile. Many services require direct physical contact between consumer and producer or, like construction, must be carried out in situ. Some involve sophisticated personal interactions that cannot be routinized and so cannot be internationalized. Such services account for a large part of total expenditures and cannot be directly traded internationally. Contrary to earlier pessimism about the implications of globalization for the terms of trade of developing countries and their growth prospects, the PrebischSinger hypothesis,4 in recent decades rapid economic progress has been linked to export growth in many less developed countries. (Accordingly, these are now more appropriately referred to as the emerging economies.) Significantly, the direction and composition of trade flows has
4

For a discussion see Toye, 2003. Neither Malthus thesis that resources limit population and income growth nor the PrebischSinger notion that the terms of trade of the developing countries would deteriorate as they increased their exports have had empirical support.

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undergone change. Manufactures, that used to flow from West to East, are increasingly being sourced in Asia for export to western countries and for local consumption. The astonishing catch-up that is occurring in China and India, that reflects their growing integration into the world economy, promises further drastic change in the global balance of economic power. Financial integration International economic integration has also taken the form of expanding international financial movements. The growth of trade-related transactions, new financial instruments, technological changes in communications and electronic transactions, as well as domestic and international financial liberalization have greatly stimulated financial activity across international boundaries and between institutions located in different countries. It is not clear, however, to what extent recent financial flows such as acquisition of short-term Treasury obligations by China and expenditures by Middle Eastern sovereign wealth funds are policy-driven, to prevent exchange rate appreciation, for example, rather than reflecting underlying economic forces toward globalization. The evidence on financial internationalization is difficult to assemble and to evaluate. Looking at financial asset and liability flows, the Bank for International Settlements (2007) indicates that international claims of banks located in industrial countries have been rising most recently at an annual rate of 18%, reaching an equivalent of 50% of world GDP by 2006, five times their level in 1980. Developing countries have also become more integrated into world financial markets and within their geographic regions (Garcia-Herrero and Wooldridge, 2007 and Kose et al., 2006). An important dimension of financial flows is foreign direct investment (FDI), some 20% of measured flows. FDI implies movements of management and technical skill as well as of finance and corporate ownership. Interestingly, the most important direct investment flows have been between the advanced countries, in large proportion into the United States. Another perspective on financial integration is by way of international equalization of rates of return (Herring, 1994; Marston, 1995). If economies were fully financially integrated with each other, the real cost of capital would be everywhere the same after, adjusting for the expected rate of inflation and exchange rate depreciation. Real interest parity

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should apply.5, 6 That would be an example of effective market integration, the even level of the water on both sides of the breached dike, in our analogy above. As interest rates have declined from their high levels in the early 1990s, international diversity of rates of return on capital (short-term and longterm interest rates) has diminished sharply.7 On the basis of five potential stages of financial market integration, ranging from the most superficial covered interest rate parity among Eurocurrency rates, to the deepest real interest rate parity between national ratesHerring (1994) found that, among the leading industrial countries, the third level of the integration covered interest rate parity among national rateshad been reached in the mid 1990s. But the remaining uncertainty about movements in nominal and real exchange rates presented an obstacle to achieving deeper financial integration. More recent studies (Garcia-Herrero and Wooldridge, 2007, Baele et al., 2004) suggest that financial integration has also extended to some of the developing countries and has gone further on the regional than on the global level. Migration Migration, another dimension of globalization, has also grown, as in the past primarily population flows from the poor countries to those offering greater economic opportunity (Stalker, 2000). While the estimated number of people who have migrated seems large, a stock of international migrants of some 190 million people, this is only 2.9% of the world population. In the developed countries, migrants now account for approximately 10% of the population, but they represent a much smaller fraction of the people in the poor countries where they originate. Moreover, the annual flow of migrants is relatively small, some 2.6 million per year, less that 0.05 percent of world population.8 Compared to resident populations in the countries where they originate or arrive, the flow of migrants represents a trickle but its impact, actual and perceived, is substantial. In some
5

Though Marston (1995) points out that domestic distortions and regulations may allow some interest rate differentials between countries to persist. 6 Another approach, widely seen as controversial, is Feldstein and Horiokas (1980) classic calculation of the relationship between domestic savings and investment, looking across countries. The correlations between investment and saving that are observed leads them to suggest that saving is still largely allocated to investment within the home country rather than across international boundaries. But there are also other explanations for this phenomenon (Frankel, 1992). 7 Though we should note that the coefficient of variation has not declined. 8 Though the figure may be larger if we include unregistered migrants.

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of the advanced countries, like the United States, recent patterns of migration appear already to have had perceptible effect on wages of unskilled workers (Camarota, 1998; Stalker, 2000). And difficulties in assimilating foreign migrants in some countriesproblems of culture, language, poverty, etc.are a source of political controversy and raise questions about potential barriers to further international population movement. Transfers of knowledge Potentially the most promising mechanism for globalization is the international transfer of ideas and knowledge. Where, not so long ago, distance and communications difficulties were powerful barriers to the dissemination of information, today informational flows across national boundaries are pervasive, automatic, and instantaneous. From the economists perspective, the issue is not so much whether there is more cultural interchange, but rather whether the technology, management information, and experiential skills that represented the competitive advantage of the advanced countries are becoming available in the less developed countries. It is the speed at which ideas are passed between people that determines the rate of progress...The Internet is like the printing press in terms of its potential impact on the mobility of thoughtsHow can one be anything but optimistic about the impact that the Internet will have on progress? (Leamer, 2007, pp. 104 and 105). The international transmission of information remains controversial. Businesses are frequently concerned about intellectual piracy, the violation of patent rights and trade secrets and some information flows run into language and skill barriers. But an important fact in recent decades is that many developing countries have learned to use advanced technologies and are producing consumer goods at, or even above, world market specifications. Foreign direct investment and foreign ownership, that frequently channel information as well as capital, have played an important role in this regard.9 Moreover, the information introduced by foreign direct investors often becomes available to other local enterprises and is utilized by domestic competitors (Ramstetter, 1991; Barth and Caprio, 2007). The formation of specialized manufacturing centers in developing countries means that, with the exception of products that require advanced
9

Enterprises with foreign direct investment participation account for more than half of Chinese exports.

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technological skills, production can be started in many locations. It has taken only a few years until manufactured products, like autos and consumer electronics, were being produced in China. The supply chains for many manufactures stretch internationally. The pace of international transmission of ideas and knowledge appears to have accelerated greatly. Technological and political developments have made it more possible to expand the scope of the market, to think meaningfully of a one world economy. Our objective, below, is to consider what such a fully globalized economy might look like and the extent to which the potentials of globalization have already been fulfilled.

Theory of international trade and globalization

How does international trade theory consider the globalization process? Traditional trade theory is concerned with trade between unequal, usually complementary, economies. The bulk of international trade during the colonial period was based, as we have noted, on the exchange of resources in the colonial countries for manufactures from the advanced countries, Such trade relies on the fact that resources and resource use are unevenly and differently distributed over the surface of the earth. The United States buys oil from Venezuela or the Middle East.10 China needs coal from Australia and copper from Chile. The result of growing demands from the emerging large economies has been increased demand pressure in energy and materials markets that has recently caused rapidly rising prices. The ideas of specialization and the basis for trade go back to Adam Smith and David Ricardo (Smith, 1776; Ricardo, 1817). The original approaches assume only one factor of production and differences between countries in production conditions, e.g. England is better suited for the production of wool and Portugal is better suited for wine. Explanations of international trade that focus on differences in countries stage of technological development have a similar basis. In contrast, comparative advantage deals with countries whose available production technologies may be the same but whose cost trade-offs differ. The HeckscherOhlin (HO) version is explicit in assuming the same
10 Due to currency valuations, these resource producing countries may not be competitive in most manufactured products.

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technology, explaining that the differences relate to the countries factor endowments and relative factor costs (Leamer, 1995; Ohlin, 1933). Even if technology and consumer tastes were the same, worldwide, assumptions implicit in the typical HO discussion, there would be trade because relative factor prices differ. This has been referred to as HO trade. Factor prices favor production of labor-intensive products in countries where labor is abundant, and relatively cheap. They favor production of capitalintensive products where capital is relatively cheap.11 In other words they rely on taking advantage of international cost differentials. Trade and the Penn Effect As it is usually presented, the simple theory of international trade does not take into account that exchange rates affect costs and patterns of international trade. The price to the importer is not only based on costs in domestic currency in the exporting country but also on the exchange rate at which currency in the exporting country can be obtained. Systematic under- or overvaluation of the exchange rate may make a significant difference. The Penn effect, the relationship between per capita income on an exchange rate and on a purchasing power parity (PPP) basis (Summers and Heston, 1991), implies systematic exchange rate undervaluation in the low-income countries. This will affect trade patterns between developed and developing countries so long as differences in per capita income between countries persist. The lower per capita GNI, the greater the undervaluation of the exchange rate. For example, suppose as in 2003, an importer can purchase goods from China on the basis of an exchange rate that is 75 percent undervalued from purchasing power parity (Adams, Gangnes, and Shachmurove, 2006). Since much of Chinese production represents processing and assembly of imported materials, the undervaluation applies to the domestic component of industrial products. In terms of labor cost, wage rates in China of 1,041 RMB yuan per month (UN statistics, 2003) translate to $0.68 per hour on an exchange rate basis and $2.72 per hour on a PPP basis as compared to $15.71 per hour in the United States.12 The foreign purchasers costs are, of course, influenced by wages in terms of the market exchange rate while the Chinese workers
11

As introductory economics students know, this would be true even if one of the countries could produce all products more efficiently. 12 For further discussion of competitiveness, see Adams, Gangnes, and Shachmurove, 2006.

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real purchasing power for domestic products is determined by the PPP rate. The undervaluation for the exchange rate based on the Penn effect can be expected to disappear as per capita income rises to developed country levels. Factor price equalization and the law of one price Factor price equalization and the law of one price are other theoretical constructs useful to a discussion of the future of globalization. Traditionally, it is assumed that integrated markets will have only one price. Assuming standardized products in competitive markets, the price should be approximately the same everywhere, except for differentials for distance, special contractual arrangements, and actual and perceived quality. Market prices for raw materials, agricultural products, and energy are good illustrations. In the framework of international trade theory, the opening of international markets applies not only to equalization of goods prices but also to equalization of factor prices. When HO trade occurs, the prices of goods tend to equalize between countries, and the relative prices of factors of production will also tend toward international equality. The country where labor is expensive will be importing labor-intensive goods, causing local wages to decline. A country where capital is expensive will in turn be importing capital-intensive goods reducing the need for local capital and presumably its return. The StolperSamuelson Theorem (Stolper and Samuelson, 1941; Neary, 2006) links trade, the value of products, and their relative return to production factors. It implies that there are indirect ways as well as direct ones to reduce differentials between countries. Not only do the flows of trade change relative returns to factors but the flows of production factors, migration and capital flows, may also have important effects on goods prices. Referring to competition between locations for mobile factors, Siebert (2006) writes This approach is in contrast to traditional trade theory where the interaction between countries through the exchange of goods and services is at center stage and where the main theory is about exploiting international differences in given factor endowments, technology, and preferences (p. 138). These ideas have been applied not only to production factors in general, but also to narrower factor categories like skilled and unskilled labor. Thus, for example, migration of unskilled workers from Mexico to the

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United States, causes the supply of unskilled workers in the US to increase and their relative wages to decline. In turn, the prices of services performed by unskilled workers decline in the United States. Presumably, the loss of workers in Mexico tends to raise wages of unskilled workers there and has implications for the prices of their products as well (Borjas, 2007; Camarota, 2001; Stalker, 2000). In theory, the law of one price could provide a basis for testing market integration.13 But it should be noted that for the law of one price to apply there must be many buyers and sellers, products must be standardized, and there must be full information: essentially a case of perfect competition. This is obviously not the situation that prevails in most markets for manufactured goods where imperfectly competitive markets are likely to be the rule. Since products are differentiated, we cannot assume that one price would apply universally. Indeed, manufactures may be able to carry out price discrimination between local consumers and those farther away. Since the world market does not meet the conditions that the Law of One Price would require, we cannot anticipate that price differentials might eventually be fully wiped out. Nevertheless, one might anticipate that as markets improve and expand in scope, competition will cause cost or price differentials to diminish, if not to disappear. Goods would be sourced when they are cheap and will be sold where they are expensive, tending to wipe out differentials. The great volume of existing research on this issue suggests that international wage and price differentials have been reduced but that many remain.

The basis for trade and the New Economic Geography

The new economic geography provides an alternative basis for trade even in a world that lacks differences in factor costs or differences in technology. Production is concentrated in particular locations because there are economies of scale, internal and external. Production comes from various locations because products from various origins are differentiated. Different varieties of the same product will often be produced by specialized firms in various countries, appealing to consumers in all regions. As a result
13

A number of studies have compared prices in neighboring countries of the European Union. They have generally shown a significant home effect even after trade barriers were eliminated (Goldberg and Verboven, 2005; Molinari, 2003).

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there is often trade in both directions within the same general industry categoryEuropean cars exported to the United States, and a few American cars shipped to Europe, for example. This type of trade is often referred to as intra-industry trade14 (Grubel and Lloyd, 1975) though we will call it, more appropriately, specialization trade. This represents trade that occurs because production is concentrated at specialized geographic nodes even in the absence of differences in factor endowments or technologies. Perhaps surprisingly, even today, the majority of international trade is carried on between the advanced countries of Europe, Japan, and North America, trade that cannot be justified on the basis of factor cost or stage of technology differences. It is the result of concentration of production to gain economies of scale, and the clustering of production activities in specialized centers, a phenomenon emphasized by the new economic geography. The specialization trade concept captures trade that takes place between like countries, countries at the same stage of economic development and with approximately the same cost structures. That is the situation between many of todays advanced countries. Presumably, it would be the situation that would prevail once full globalization has been accomplished. The ideas of the new economic geography have their roots in the much older doctrines of the economics of location and spatial agglomeration, dating to von Thuenen (1826) and Lsch (1938) and in the new economics of economic growth (Romer, 1986) and international trade (Helpman and Krugman, 1985). The contribution of location economics lies in the theories of how economic activity is distributed geographically, the notions of agglomeration and geographic specialization that are behind the creation of cities and transportation networks. What distinguishes von Thuenens location theory from trade theory is the initial assumption that the world is a blank slate, that there are no trade barriers, other than transportation cost, and that initially the endowments of resources and technology are similar throughout. One may think of one substantially homogenous or flat plain. Theory tells us that scale and agglomeration economies will lead to the formation of cities, a consequence of centripetal locational
14 The difficulty with the term, intra-industry trade, is that some intra-industry trading activity can involve different stages of production in the supply chain, production of parts in one country location and assembly in another, for example, the result of differences in labor cost that are essentially an HO phenomenon. Much Chinese trade has been referred to as processing trade since it involves use of raw materials and parts produced elsewhere, often in the same industry.

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forces (Lsch, 1938). Transportation costs, on the other hand, have a centrifugal effect, leading to dispersion of production. This means that the geographic dispersion of industries depends on their characteristics. Industries with high transportation costs and low economies of scale will be scattered across the marketplace close to the consumer. There will be little need for trade. Industries with relatively low transportation costs and large economies of scale or agglomeration economies will be centralized and will involve trade. In many industries, differences in the characteristics of various stages in the production process account for segmentation of production. Manufacture of parts may be centralized while assembly may be widely distributed, for example. Advanced communication and new management structures have facilitated segmentation along the supply chain across international boundaries. An example is the central production of engines and other parts in the automobile industry and their assembly in widely distributed assembly plants. An international case is the production of chips in one country and their wiring and assembly into computers in others. Modern trade theory (Helpman and Krugman, 1985) combines the ideas of increasing returns and monopolistic competition, specifically the competition between varieties of a common but differentiated product. Using the DixitStiglitz (Dixit and Stiglitz, 1977) framework of monopolistic competition with a CES production function and assuming increasing returns, Fujita, Krugman, and Venables (2001) (we will refer to them as FKV) show that increasing returns at the level of the firm, transport costs, and factor mobility can cause spatial economic structure to emerge and change (p. 62). Their model is a simultaneous system in which the distribution of manufacturing across region evolves over time to the extent that wages differ across region. Workers respond to wages, but in turn wages are an endogenous variable that depends on the distribution of manufacturing and the supply of labor. Modern economic history and location theory add the notion of path dependence that gives special advantages to locations once a specific industry has been established there (Arthur, 1994; FKV, 2001, Ch. 16). In the real world, we see the shift of manufacturing industry to developing economies and the tendency toward diminution of the wage differentials between advanced and developing economies. These are the trends that we associate with globalization and HO trade. But we also see

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continuation of specialized production centers, some in advanced countries and some in the emerging economies, of firms in particular fields clustering for mutual advantage, Silicon Valley, for example, and of specialized manufacturers, often producing their own trademarked goods, Nokia in Finland and Waterford in Ireland, for example.15 FKV (2001, Part III) extend their theoretical framework from the regional economics level to the international level to account for these developments.

A globalized world?
While there is much discussion of globalization, few scholars have stopped to think about the ultimate outcome, One World. What would it look like? The ultimate globalized economy is one potential market place with common technology, factor endowment, and prices. The competitive playing field would be open across the worlds entire area. Another way to consider the potential of globalization is to see it as the ultimate equilibrium so that potentially profit-making disparities between world countries had been wiped out. The hallmark of a fully globalized economy is approximate equality between prices at all locations, except, of course, for transport and relocation cost differentials. Factor endowments, real per capita incomes, and consequently, wages and capital costs would be more alike internationally than they are today. But the distribution of the population and of industry is likely to remain uneven reflecting the advantages of scale economies and clustering (cultural as well as economic) and the role of path dependence. This is not to imply that the world will ever achieve a global equilibrium or, indeed, whether complete globalization is feasible (Rodrik, 2005). Continued change is an essential feature of a dynamic world economy. In an evolutionary world, at any point in time, the technological potential of countries may differ: some are more advanced, while others lag. Differences may persist for long periods, resulting in trade flows that take advantage of the exporting countrys technological skill. This is one of the reasons one might expect to continue to see high-tech machinery to continue to be sourced in the US, Europe, or Japan for many years. And some barriers to movement of goods, people, or capital are likely to remain.
15 Such advantages may include local knowledge and experience, the availability of specialized workers and of experienced suppliers.

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There are always going to be some differences in prices (and wages and rates of return on capital) between different geographic locations as some areas prosper and others fade. Evidence of such disequilibria and of continued changes is apparent, for example, if we observe economic developments that occur within a single large country, say the United States. It is not possible to predict when, if ever, the ultimate globalization is achieved. Much depends on the parameters that apply. The interaction of centrifugal and centripetal forces that govern location suggests that as barriers between countries diminish and as knowledge becomes widely available, the global perspective will be more like the one of the new economic geography than the one of HO trade. In many respects, we are still far from the equilibrium outcome. Ghemawat (2003) has proposed a term, semi-globalization. Empirically cross-border evidence indicates that we are in a state of semi-globalization and will, extrapolating from historical experience of the last few decades, stay there for the next few decades. The integration of markets for products, capital, labor, and knowledge has increased in recent decades in many instances to all-time highs but falls far short of the economic ideal of perfect integration (pp. 56). It is important, however, not to generalize too broadly, since where we are with respect to globalization depends greatly on the particular dimension of globalization being considered. Resource trade continues to grow with expanding industrial activity as in the past. Indeed, as economic growth in large emerging countries, like China and India, accelerates, satisfying requirements for basic materials has become an increasing challenge, resulting in the need to go ever farther afield to meet resource requirements. Many of the worlds markets for primary resources, like energy and metals and for basic agricultural products are already worldwide. With respect to world trade in manufactures, the growth of global procurement and interaction has been astonishing. The supply chain increasingly crosses international boundaries; materials are secured in one country, turned into parts in another, assembled still elsewhere, and finally sold all over the world.16 A major fraction of the manufactured goods sold

16

An amusing little book (Rivoli, 2005) traces the flow of raw cotton from the United States to various developing countries where the cotton is turned into a T-shirt and then back to the United States as a finished product. Ultimately, the shirt ends up for sale as used clothing in an African market.

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in American super stores like Wal-Mart originates abroad.17 This is largely HO trade, carried on precisely because there are still large differentials in costs between developed and developing countries.18 This trade represents a response to disequilibrium. As international cost differentials decline, the incentives to go to distant sources to take advantage of lower costs prevailing there will diminish. The new economic geography would suggest that the interplay of scale economies, transportation cost, and path dependence would leave an uneven geographic distribution of production, one that may be different from that of consumption. That would leave room for trade in manufactures reflecting the advantages of specialized production centers. In other words, reduction in international factor cost and technology differences as globalization proceeds will alter the rationale for manufactured goods trade from traditional trade theory to new economic geography perspectives. Trade in services is increasing as electronic transmission has made it possible to transmit some service productsnot just call centers but also sophisticated service activitiesover long distances. Electronic services trade is still in its infancy, motivated by large international wage differences. We are far from a global service market. But that will be limited in any case, since a large proportion of services requires direct personal interaction or work on site. The extent to which world financial markets are integrated and the potentials for further integration remain uncertain. Even though, the international flow of capital has seen rapidly increasing, for most countries, international financing still represents only a small fraction of the total volume of financial transactions. Moreover, the stock of cross-border financial holdings remains a small fraction of total assets (French and Poterba, 1991). And Lane and Milesi-Ferretti (2003) write that a one world interest rate is not supported by the data. As investors seek out profit opportunities worldwide, the integration of world financial markets is likely to continue. That financial opening and integration contribute to economic development and growth is likely, though uncertain (Kose et al., 2006). But recent events suggest that
17 The precise share of Wal-Marts imports from China is subject to debate. On one hand, Wal-Mart indicates that its imports from China are $15 billion approximately compared to sales of $250 billion in recent years. On the other hand, inspection of the goods on the shelf (other than foodstuffs) suggests that one half to three quarters were made in China. 18 The situation for agricultural products, where trade restrictions apply widely, is a very different situation.

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increased financial integration may also carry significant risk. The experience of financial contagion and crisis in East Asia in 1997, related to the use (misuse) of short-term capital flows, and the more recent wide international implications of the collapse of sub-prime mortgage-based securities suggest that uncontrolled international financing may be a dangerous tendency. The potential of globalization with respect to population is difficult to visualize. Migratory population movements increase the supply of labor available in the high-wage countries and have effects on some classes of wages similar to the importation of labor-intensive products. Even though the flow of immigrants is small relative to total populationcertainly smaller than one would think on the basis of discussion in the media powerful political opposition is gathering in many countries. Finally, with respect to the spread of information and knowledge, the stage is set for continued rapid internationalization. What is seen in the media of one country is increasingly being seen throughout the world. Technology that is available at one university or technical center is available elsewhere through the Internet with little delay. University education and research is increasingly internationalized. Multinational corporations are transferring their skills to take advantage of low-cost manufacturing sites. Trade secrecy and intellectual property protection still stand in the way of the movement of knowledge, as we have noted above. The critical issue here is ones time perspective. Informational barriers are not permanent. At best, they may serve for a few years. Fortunately, over the long term, the international transmission of ideas, knowledge or technology proceeds inexorably.

Conclusion
Globalization is an ongoing process, one that has increasing momentum and that is likely to continue for a long time. While the globalization process is far advanced in the production and trade of manufactures, with respect to finance and migration, globalization still has a long way to go. Importantly, the worldwide spread of knowledge will provide support for further globalization. The rapid expansion of world trade has served as a critical driving force for economic development, particularly in East Asia. As trade barriers were

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lowered, as transportation and communication costs have declined, and as skills were acquired, the scope of the market has expanded geographically. This has made it possible to exploit the differences in manufacturing cost. Globalization has not yet wiped out the huge cost differentials between advanced and emerging countries. Indeed, the fact that the world is not flat is the dominant basis for the vast expansion of trade between East and West and for its impact on growth in the developing world. Looking to the future, the disparities in incomes (and costs) between the old industrial countries and the new will gradually fade as the emerging economies catch up with the more advanced ones. At that point, specialization and agglomeration, as described in the new economic geography, will be the dominant basis for trade in a more fully globalized world economy.
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