The Great Convergence

Baldwin, a trade economist, argues that globalisation has proceeded in two distinct phases separated by a change in what could be moved cheaply, and that conflating them produces confused policy.

His framework rests on three separation costs. Before the nineteenth century, moving goods was expensive, so production and consumption occurred in the same place. Steam power and then containerisation reduced the cost of moving goods, which unbundled production from consumption and produced the first phase of globalisation, in which countries traded finished goods and industrialised as complete national systems.

The second unbundling came from the information and communications technology revolution around 1990, which reduced the cost of moving ideas. This allowed firms to relocate individual stages of production offshore while retaining control of the technology and coordination, which produced global value chains. His central point is that this phase moves know-how across borders alongside capital, which is why a small number of developing countries industrialised extremely fast while others did not.

He argues the third separation cost, moving people, remains high, and that its reduction through telepresence and remote work would produce a further phase.

The policy implication is that industrial policy designed for the first phase, aimed at building complete national industries, does not work in the second, where the objective is to join a value chain at a specific stage.

The framework is analytically clear and is now widely used. The remote work prediction has been partly tested by the pandemic with mixed results.