Globalization

[csizemore@hsdent.com]

In the November/December 2008 Foreign Affairs, Marc Levinson had some interesting comments on globalization:

As politicians blame international trade for closed car-parts factories in Ohio, shuttered furniture plants in the Carolinas, and the arrival of deadly pet food from China, discomfort with the global economy is growing throughout the United States.... Yet even as Americans lament too much globalization, they are in fact on the verge of facing the opposite dilemma: too little. Two factors are driving the retreat of globalization: rising transportation costs and diminishing reliability....

The end of globalization's golden age will have major political and economic implications. "Deindustrialization" is likely to fade as a domestic political issue as the recent wave of factory closures in the United States yields to a tide of openings and expansions.... Industrial unions may even regain a bit of the bargaining power they have lost since the 1970s. Consumers, who have grown accustomed to seeing imports drive down the prices of clothing, furniture, toys, and appliances, may be unhappy when imports become costlier.

Levinson brings up several points that are valid. There are decreasing marginal returns to globalization at this point. The low-hanging fruit has already been picked and most inefficiencies have been wrung out of trade system. Ports can be made more efficient, but the efficiency gains going forward are not likely to be as large as the ones of the past 40 years. Ships can get bigger, thus moving more freight per unit of fuel. But even this has limits, as the Panama Canal's expansion won't be complete for several years. Plus, larger ships take longer to unload in port. And once unloaded, the goods still have to be sent across rail and/or highway to get to their final destination.

Levinson believes that these issues, along with rising fuel costs, point to higher inflation. We disagree for two fundamental reasons:

1. Capacity constraints should be easing in a protracted recession with fewer final goods in demand.
2. Fuel costs are in free fall at the moment. Though they might have one last rally, we expect commodity prices to drift downward for several years.

We continue to believe that deflation rather than inflation will be the primary worry. But we do agree with Levinson that import growth will slow markedly. With the United States and Europe destined to mire in recession for the foreseeable future, countries that depend on exports, like China and South Korea, will need to find new partners. Ideally, they will focus more on their own internal markets.

[csizemore@hsdent.com]

If this headline does not provide final evidence that the "de-coupling" argument is dead, then nothing will:

"East Asia nations hit by downturn"
BBC News, January 22, 2009

China and South Korea have announced sharp falls in economic growth, in a further sign of the financial crisis sweeping through east Asia.

China said its GDP fell to 6.8% in the final three months of 2008, from 9% in the previous quarter.

South Korea said its economy shrank by 3.4% in the last quarter of 2008 compared with the year before.

Meanwhile, Japan reported that its exports plummeted 35% last month - the sharpest fall on record.

http://news.bbc.co.uk/2/hi/business/7843892.stm

Call it hope or call it naivete, but a common theme for much of 2007 and early 2008 was that the emerging market economies would be able to survive and prosper though a stark American downturn. Given these economies' dependence on exports, HS Dent repeated wrote that this was highly unlikely. We fully believed that most emerging markets would "go down with the ship," and thus far this has been the case.