Article By Thieß Petersen, Senior Advisor, Global Economic Dynamics Project, Bertelsmann Stiftung, Germany and Lecturer, European University Viadrina
Artificial intelligence (AI), big data and other digital technologies have the potential to reduce the costs of the international division of labour in the future. The resulting merging of markets would improve the supply of goods and services to people. However, some companies and their employees may lose international competitiveness. This increases the danger that governments will take protectionist measures to shelter these companies.
AI and Big Data reduce costs of international division of labour
In the context of digital change, technological developments are in sight which could have far-reaching consequences for the international division of labour. The renowned economist Hal Varian, for example, is convinced that speech recognition and translation programs will make real-time verbal language translation possible in the near future. This would eliminate language barriers in international trade and significantly reduce the costs of global trade. The result would be an increase in cross-border trade and the underlying international division of labour (Varian 2016, p. 8; Melitz and Toubal 2019).
Cost reductions induced by digitalization can also be expected for other trading costs. Examples include more efficient coordination of logistics to overcome national borders and to distribute products in the various foreign markets, lower search costs to identify suitable customers abroad, and software solutions for processing digitally available customs documents. (Bartholomae 2018, p. 9). These reductions in the costs of international trade suggest an expansion of the international division of labour.
International trade improves material well-being of citizens
Intensifying the international division of labour and the associated international trade improves the supply of goods to citizens through at least three channels (Petersen 2016):
(1) International division of labour means that each country concentrates on manufacturing the products for which it has the greatest cost advantages. For consumers, this means that they can buy cheaper goods from abroad. The purchasing power of consumers increases. This allows the consumption of a larger quantity of goods, i.e., an increase in material prosperity.
(2) Domestic suppliers are losing market power due to additional competition from abroad. Existing profit margins must be reduced. For consumers, this means lower prices, i.e., a further increase in their purchasing power.
(3) Finally, the additional competition from abroad accelerates the structural change of an economy. Less competitive companies disappear from the market. The factors of production used there can now migrate to future-oriented industries. This process of “creative destruction” increases the productivity of the entire economy (Andersson, Braunerhjelm and Thulin 2011). This, too, is a positive development for consumers because the prices of goods are falling.
All in all, the international division of labour induced by AI and digital technologies is a positive development for people in their role as consumers: they can buy more goods and services at lower prices.
International trade means loss of income for some citizens
In their role as producers, i.e., as capital owners or as employees — it can happen, however, that some individuals suffer economic disadvantages as a result of a stronger global division of labour resulting from digitalization. The owners and employees of companies that are no longer competitive with the new providers from abroad have to suffer income losses.
In highly developed economies such as the United States, Germany, and the United Kingdom, this currently in particular affects industries competing with providers from low-wage countries. Even in the market for industrially produced goods, the advanced economies are coming under growing pressure: here they are increasingly losing their price advantages to emerging markets, especially China.
Conflicts of interest between consumers and producers
In principle, AI and digital technologies therefore have the potential to promote the economic advantages of the international division of labour and thus increase people’s material well-being. However, an intensification of the cross-border division of labour as a result of digitalization means a loss of income for individual producers. This is why there is a great likelihood that these individuals will advocate protectionist measures — a concern that contradicts the interests of consumers.
Theoretical considerations and historical experience suggest that political decision-makers are more likely to listen to the interests of the endangered domestic suppliers, i.e., the capital owners and employees — and resort to protectionist measures (Petersen 2019). In this way, however, society as a whole is foregoing increases in material prosperity.
Whether the digitalization-related reduction in the costs of cross-border trade actually leads to an intensification of the international division of labour is therefore not guaranteed.
What needs to be done?
An intensification of the international division of labour as a result of digitalization basically leads to an increase in the material prosperity of society as a whole. At the same time, however, there are also groups of people within a country who suffer income losses. In order for digital progress to benefit as many citizens as possible, the resulting increases in income should be distributed in such a way that the negatively affected groups of people also gain from them. This recommendation is not only for reasons of fairness (Wright and Schultz 2018). A broad diversification of digitalization-induced income growth is also necessary so that the social acceptance of digital progress is not lost.
Many policy areas are called upon to take appropriate measures — improving social security mechanisms and restructuring the entire education system are some examples to prepare the ground for sustainable AI futures. Because digitalization and international division of labour increase the material prosperity of the economies involved, the winners of digitalization and international division of labour in a country can compensate the losers — at least in principle — and still improve their own income situation.
In general, the digital transformation of the economy and society requires social protection. In this way, people can obtain the necessary security they need to help shape digital change instead of preventing it. Without this security, a blockade attitude on the part of many citizens can be expected.
Andersson, M., P. Braunerhjelm and P. Thulin (2011). Creative Destruction and Productivity: Entrepreneurship by type, sector and sequence. Swedish Entrepreneurship Forum Working Paper.
Bartholomae, F. W. (2018). Economic Impact of Digitization on International Competition and the International Division of Labor. Volkswirtschaftliche Diskussionsbeiträge, Universität der Bundeswehr München.
Melitz, J., and F. Toubal (2019). The potential impact of machine translation on foreign trade – caution, please. VoxEU.
Petersen, T. (2019). Davos Discussion – The Paradox of Protectionist Policies. Global Economic Dynamics. Bertelsmann Stiftung.
Petersen, T. (2016). GED Explains: Why More Foreign Trade Means More Growth. Global Economic Dynamics. Bertelsmann Stiftung.
Varian, H. R. (2016). Intelligent Technology. Finance and Development 53(3): 6 – 9.
Wright, S. A., and A. E. Schultz (2018). The rising tide of artificial intelligence and business automation: Developing an ethical framework. Business Horizons 61: 823 – 832.