Such was the fascination with technology shrinking the world that it even prompted an early complaint by George Orwell, in 1944: “Reading recently a batch of rather shallowly optimistic ‘progressive’ books, I was struck by the automatic way people go on repeating certain phrases which were fashionable before 1914. Two great favourites are the ‘abolition of distance’ and the ‘disappearance of frontiers.’”32
After World War II, German philosopher Martin Heidegger continued in this vein with his discussion in 1950 of the abolition of distance. He implied that “everything is equally far and equally near” and observed that “the peak of this abolition of every possibility of remoteness is reached by television, which will soon pervade and dominate the whole machinery of communication.”33 Canadian cultural critic Marshall McLuhan popularized this vision of television in the 1960s and extended it to other technologies: “Today, after more than a century of electric technology, we have extended our central nervous system in a global embrace, abolishing both space and time as far as our planet is concerned.”34 Since then, the focus has shifted from television to the Internet and information technology, as witness Friedman's contribution.
I should add that this emphasis on technology—especially, in the last few decades, communications technology—as the driver of World 2.0 seems, if anything, to have increased since the financial crisis, probably because the policy outlook appears less promising than it did precrisis. Back when Friedman wrote The World Is Flat, it was still possible to evoke (as he did) the 1989 fall of the Berlin Wall as capturing the spirit of the age. Not anymore. Other fences have, quite literally, gone up rather than come down: between the United States and Mexico, India and Bangladesh, and Israel and Palestine, for example. More broadly, the aftermath of the crisis has seen a collapse in public support for globalization, a surge in separatism, new challenges associated with multipolarity (particularly from a U.S. perspective), and uncertainty about the dollar's status as the world's reserve currency. Even the diehards straining to reassure believers that World 2.0 can be achieved recognize that recent changes in the policy climate do not help.35
Countering Technotrances
How can we answer the usual assertion that this time is different—that the technology du jour will lead, in fairly short order, to the nearly complete integration associated with World 2.0?36 The simplest approach is to note from the preceding historical parade that the technologies previously supposed to be apocalyptic, while indubitably important, have clearly led to only limited cross-border integration so far. This suggests less than complete credulity in current predictions of the technological apocalypse. Historical comparisons also suggest more specific reasons for skepticism. Thus, the telegraph—the “Victorian Internet” cited by Livingstone as one of his three transformational technologies—arguably had a bigger impact on cross-border integration, at least in terms of commodity prices, than the Internet can because the telegraph cut previous barriers by well over one-half.37
We can also try to confront such apocalyptic assertions with real cases. Let's not just take any case; let's take a case where the idea of the Internet abolishing borders and distance is relatively plausible. How about Google? If there were ever a business capable of using the Internet to project a powerful competitive advantage across national borders, Google should be it. In my last book, published in 2007, I noted Google's travails with Chinese censors, but focused primarily on its problems in Russia, where it trailed local market leaders Yandex and Rambler. I also highlighted cultural barriers, specifically linguistic complexities that affected Google's algorithms. (Russian nouns have three genders and up to six cases, verbs are very irregular, and the meaning of words can depend on their ending or on the context.) Four years and a global financial crisis later, is technology overpowering these and other barriers?
Given the company being studied, it is only natural that we google its globalization/internationalization since 2007 (although I did also talk to its CEO, Eric Schmidt). Doing so underlines how impressive Google's performance has been overall: it now offers its services in a dizzying array of languages, has grown non-U.S. revenues to more than half the total, and has established the kind of name recognition around the world that, according to one survey, makes it the world's first $100 billion brand.38 But it is also clear that Google has encountered lots of national barriers along the way.
In Russia, Yandex has widened its lead.39 And politics as well as culture is intruding: the Russian government has reacted to perceptions of increasingly close ties between Google and the U.S. government by announcing work on a “national search engine” to boost cybersecurity.40
Google's political/administrative situation in China has deteriorated even further. Although China was the only country in the world where Google was—after much internal debate—willing to offer a local site that complied with local censorship laws, cyberassaults prompted it to pull the plug in 2010. And Google has run into trouble in more than thirty countries for, among other things, violating local privacy laws while gathering data for its StreetView mapping service.
Of course, new apps such as Google Earth, Maps, StreetView, and Places emphasize rather than deemphasize geography, which is yet another inconsistency with World 2.0. Geography is also impinging on Google's ambitious plans for cloud computing. As more governments worry about where “their country's” data will be housed, servers may have to be located locally: the Indian government is already pushing Google, along with BlackBerry, in this direction.
Finally, economic differences continue to matter as well. Thus, in India, where more people are offline than on, and where mobile devices greatly outnumber Internet connections, Google has tweaked its product line to include more offline and mobile offerings.41 And to round out this coverage of big emerging BRIC (Brazil, Russia, India, and China) markets, perhaps the most unusual aspect of Google in Brazil is the success of its Orkut social network, which has a massive lead locally over Facebook. The last I heard, they were still scratching their heads at Google's Mountain View, California, headquarters about why Orkut should do better in Brazil than just about anywhere else.
Given this panoply of differences across countries, the fact that search is a worldwide need doesn't mean that Google can approach the world in a way that ignores national boundaries. Another strike against technology as the guarantor of World 2.0.
Finally, and more ambitiously, one could go beyond individual cases to look at the Internet itself and make the case that it does not correspond to the visions of World 2.0 either. While that goes beyond the scope of this chapter, I do have in front of me, as I write this, the most recent issue of the Economist bearing the title “The Web's New Walls” and the subtitle “How the Internet's Openness Is Under Threat.” Let me quote an excerpt:
Fifteen years after its first manifestation as a global, unifying network, it [the internet] has entered its second phase: it appears to be balkanizing, torn apart by three separate, but related forces. First, governments are increasingly reasserting their sovereignty … Second, big IT companies are building their own digital territories, where they set the rules and control or limit connections to other parts of the internet. Third, network owners would like to treat different types of traffic differently, in effect creating faster and slower lanes on the internet. It is still too early to say that the internet has fragmented into “internets,” but there is a danger that it may splinter along geographic and commercial boundaries.42
Another article in the same issue makes a parallel observation about the sociocultural fragmentation of the Internet—pointing out, among other things, that as Internet use in Brazil has risen, better-off Brazilians are leaving Google's locally dominant social network, Orkut, for Facebook and even have a new word—the equivalent of “orkutized”—for places undesirably full of strangers.43
The point of all this is not to deny the importance of the Internet or, more generally, technology. As I stressed in chapter 1, technological progress is probabl
y the most exciting feature of the modern world. Cross-border communication in particular has experienced astonishing reductions in costs and expansion in capabilities. For example, the cost of a three-minute phone call from New York to London fell from $350 in 1930 to about 40 cents in 1999 and is now approaching zero with Internet telephony! But connectivity is not the same as convergence. Just because people in different parts of the world can talk to each other much more cheaply doesn't guarantee they will do so to any great extent (recall the 2 percent internationalization levels of phone calling minutes).
The broader point of this chapter has been to debunk exaggerations about unfettered globalization that persist on both sides of the globalization debate and across popular culture. If you feel drenched in data, that was the idea. It should now be clear that the world is only semiglobalized today—and still will be tomorrow.
This is more than just “college knowledge” of the sort that might come in handy at cocktail parties. Semiglobalization is exciting not primarily because it is realistic, but because it means that a lot of room still exists to increase cross-border integration. To understand whether and how to grasp these opportunities, though, we need to understand why integration still remains quite limited, even after decades of deliberate opening up. This is the task I take up in the next chapter.
Chapter Three
Borders, Differences, and the Law of Distance
THE LAST CHAPTER examined the cross-border integration of markets and concluded that the world economy is still only semiglobalized. This chapter digs into the barriers that underlie observed levels of cross-border integration—the borders, differences, and distances that still separate countries in our semiglobalized World 3.0. This chapter identifies the barriers that would have to be removed or reduced to increase integration—a possibility highlighted by the diagnosis of semiglobalization in chapter 2 and pursued further in chapter 4. It also indicates that instead of the Heideggerian vision of a world in which “everything is equally far and equally near,” countries are better thought of as located in (and occupying) physical and virtual space at very different distances from one another.1
This more realistic vision suggests a distinctive geographic structure for World 3.0, in which both borders and distance are important. By contrast, World 1.0 presupposes that only borders matter; it buckets countries into “home” and “abroad” even when speaking of international relations. And in World 2.0, neither borders nor distance are supposed to matter. The geography I define for World 3.0, in which the intensity of interactions is affected not only by borders but also by distance—the “law” of distance, as I refer to it—will prove particularly helpful later in the book.
Note that this chapter's diagnosis is linked to the previous one's in the sense that semiglobalization is necessary for interesting variations in distance. With zero cross-border integration, all foreign countries would be prohibitively distant; with complete cross-border integration, all countries would be cheek by jowl. But semiglobalization isn't sufficient to establish that it is interesting to organize our thinking about the world out there in distance-dependent terms. That is the broader task at which this chapter makes a start.
We begin by looking at the case of a particular border, between the United States and Canada, that shouldn't, as national borders go, matter much. But it turns out to be a huge impediment to merchandise flows. To understand why, we go micro and look at a specific business, a small company named Ganong, that exports jelly beans from Canada to the United States. The cross-country differences flagged by this case and the earlier example of Google help introduce a research-based framework I've created for understanding distance. I call it the “CAGE” distance framework to refer to the cultural, administrative, geographic, and economic differences or distances between countries.
Studies using subsets of the CAGE factors do a good-to-great job of explaining patterns not just in trade and FDI flows, but in people, financial, and informational flows as well. Estimates drawn from such studies help us appreciate how much farther apart the typical country pair is on these dimensions than the United States and Canada, and how much that should be expected to matter. This chapter ends with a discussion of the broader significance of this distance-based geographic reconceptualization. Chapter 4 returns to the specifics about what to do about the CAGE-related barriers that continue to constrain cross-border integration.
The Mystery of the Missing Trade
The U.S.-Canadian border is the world's longest undefended border. Trade across it accounts for the world's largest bilateral trading relationship, still larger than that between the United States and China. Two-way trade between the United States and Canada amounted to nearly $750 billion in 2008 before falling to $600 billion in 2009, thanks largely to the decline in energy prices and weakness in the auto sector; in both areas, Canada is the United States' largest foreign supplier. So important is this trading relationship for Canada that the Canadian government regards several industries as more susceptible to U.S. economic conditions than to domestic ones.2 Thus, Canada's $100 billion drop in exports to the United States between 2008 and 2009 was three times as large as the decline in Canada's GDP during that period.
All this suggests lots of trade, but we shouldn't just jump to the conclusion that the border doesn't matter. In fact, economists who've looked at U.S.-Canada trade in recent years haven't puzzled over why it is so large; rather, they've wondered why it isn't nearly as large as one would expect if the border didn't matter. There has been a spate of work on “the mystery of the missing trade,” since the original finding that in 1988, when the United States and Canada signed a free trade agreement, merchandise trade between Canada's different provinces was twenty-two times as intense as their trade with the United States.
The 1988 free trade agreement did reduce the “home-bias multiple,” as economists call it, by the mid-1990s, but only to twelve (and with the multiple remaining stuck at thirty to forty in the case of services).3 It is currently estimated to be between five and ten—lower than before but still significantly greater than the level of one that would correspond to zero home bias.4 Corroboration of significant border effects comes from the price differences between the United States and Canada. As so many border dwellers know, there's a reason to go on international shopping trips (although this type of “suitcase trade” amounts to only a small percentage of total trade, and is therefore insufficient to eliminate price differentials).5
How do other borders stack up to this one? It's hard to tell, since very few countries maintain data on within-country trade of the sort available for Canada. However, we can get a sense of merchandise trade across regions within a country by examining regional transportation flows.6 One study that does so concludes that German länder, or states, traded four to six times as much with each other as with other EU countries in 2002, and that the corresponding home bias multiple for the French regions was about fifteen.7 More than three decades after the EU eliminated all formal trade barriers, such as tariffs and quotas, between member states, the German and French borders still matter a great deal.
If borders still matter so much between neighbors, they cast an even bigger shadow on trade between countries farther away from each other. My analysis of Spanish regions' merchandise trade with other OECD countries over 1995–2005 found a home bias multiple ranging from fifteen with Portugal to 150 for Japan!8 As we know from other studies, Spain hasn't integrated with world markets as well as Germany or even France, and these numbers bear that out.9 And the variation in the home bias multiple reminds us that a border effect is a “bilateral effect”—that is, it depends on which country pair one is talking about—rather than a “unilateral effect,” which depends on the attributes of just one country.
For even more evidence that national borders impede trade, we can look to situations where new borders have arisen or old ones have gone away. In 1993, when the former Czechoslovakia broke into the Czech Republic and Slovakia, the two government
s took significant measures to preserve open trading relations, including a customs union, a temporary payment mechanism to deal with delinked currencies, and an agreement stipulating free movement of labor. Yet, trade intensity between the two new countries fell from forty times the “normal” level of trade with other countries in 199110 to ten times by 1995.11
Meanwhile, Germany's experience illustrates the effects of removing national borders. In the five years that followed the reunification of the former East and West Germany in 1990, trade between the two shot up sixfold, and the share of intra-German trade in their overall trade grew fourfold.12 These gains reflected large investments intended to facilitate integration, including spending on physical infrastructure like rail lines and highways, and the East's rapid development as a result.
Even more interesting than the rapid increase in trade, however, are estimates that it will take decades before effects of the former East-West border disappear.13 Erection of a new border can cause trade to collapse almost overnight, as in the Czechoslovak example, but removing a border has a much slower economic impact. This makes sense when you think about the relationships that accrete over time between buyers and sellers, the investment in familiar brands, the knowledge that locals have about local markets, tastes, preferences, and, of course, connective infrastructure. Removal of a barrier doesn't put outsiders on equal footing with locals—not for decades, at least.
Of course, there are also studies focused on emerging markets. Although Brazil opened up to more international trade during the 1990s, Brazilian states still traded an estimated twenty-seven times more with each other than with foreign countries in 1999.14 China's estimated home bias in the late 1990s was also in the twenties.15 This figure would have been higher if Chinese provinces hadn't become significantly less integrated with each other: between 1987 and 1997, provincial border effects are estimated to have more than doubled.
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