BAD NEWS FOR WESTERN JOBS AS IDEAS ARE ALSO MADE IN CHINA / THE FINANCIAL TIMES COMMENT & ANALYSIS

May 1, 2014 6:59 pm

Bad news for western jobs as ideas are also made in China

By Gillian Tett

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First money and low-cost production jumped across borders, now it is creativity and services

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In recent years the phrase “Made in China” has struck fear into the hearts of western workers and politicians. As China has swelled in economic might – to a point where it will soon outpace the US in size, according to data released this week – its factories have undercut western rivals, causing manufacturing jobs to move.

But it is not just widgets that western policy makers need to watch, but the worldwide web. For if you want to understand why debates about inequality are all the rage in the Anglo-Saxon political world – and why Thomas Piketty’s new book on the subject, Capital in the Twenty-First Century, has struck such a powerful chord – it is important to realise that the face of globalisation is undergoing a subtle, but important, shift.

Most notably, the internet is transforming cross-border business. And while this process of digitisation creates opportunity – Mumbai entrepreneurs who would once have printed T-shirts might now concoct their own designs and sell them around the world – it also threatens to create new categories of winners and losers (some western designers may find themselves undercut by their Indian peers). Hence the interest in inequality.

To get a sense of that, take a look at a report just released by the McKinsey Global Institute on economic flows in a digital age. This analysis estimates that in the past two decades the level of cross-border economic flows has risen fivefold: it was about $5tn a year in 1990, but by 2012 had risen to $26tn, or 36 per cent of global gross domestic product.

On one level that is unsurprising; it is commonplace that we live in a “globalised” world. What is less appreciated is that globalisation has undergone a shift. In the decade before 2007, the fastest growing component of cross-border flows was money; the credit boom sparked a surge in capital flows and market integration. Flows of tradeable goods also rose sharply, as western manufacturers shifted production to low-cost countries. In the process China, for example, went from having 2 per cent of the world’s trade in tangible goods in 1990 to 12 per cent in 2012.

Since then two striking shifts have taken place. First, financial globalisation has gone into reverse as nervous banks became more cautious in their lending after the crisis. MGI estimates that cross-border financial flows are 70 per cent lower than in 2007. Second, a dramatic expansion in digital communication has boosted trade in other services – from ecommerce to consultancy.

Or to put it another way, whereas it used to be money and low-cost production that jumped across borders, now ideas and services are following suit courtesy of the internet. MGI estimates that these “knowledge intensive flows” are now worth a heady $12.6tn; to set this in context, this is half of all cross-border flows, and almost four-fifths the size of the US economy.

In some senses this new twist to globalisation looks wonderful. It could lift millions out of poverty, make businesses more efficient, lower costs for consumers and enable entrepreneurs to tap new sources of demand. The rub, as McKinsey suggests with vast understatement, is that “some workers will be challenged”.

Of course not all western jobs are at risk. But as roles are replaced by bar codes and bytes, a bifurcation is under way. In countries such as the US there are the so-called “lovely” high-skilled, well-paid jobs at the top, and “lousy” low-paying menial jobs at the bottom – with the middle being squeezed. The new face of globalisation does not just threaten western manufacturing jobs, but many service jobs too.

Of course, as an optimist might argue, this shift will also create winners. The perennially chirpy McKinsey suggests, for example, that countries at the centre of global flows – such as the US and Germany – will benefit hugely, reaping 40 per cent more growth than less connected areas. So will companies and individuals with the right skills.

But a world grappling with the disruption caused by $12.6tn of “knowledge intensive” flows is the perfect recipe for a new debate about inequality. Even – or especially – when you can purchase Mr Piketty’s book today so easily on a digital network (or even in digital form), with barely the need to interact with an old-fashioned bookseller at all.

Copyright The Financial Times Limited 2014.