Globalization is not an easy term to define. Globalization is a word that has several connotations today. But broadly speaking, it is a process which began around the late 1970s, by the shift in world economy from an international to a more global one. In the international economy, individuals and firms from different countries traded goods and services across national boundaries, and the trade was closely regulated by nation-states. In the global economy, goods and services are produced and marketed by an oligopolistic web of global corporate networks whose operations, although spanning several national boundaries, are only loosely regulated by nation-states. It is also a process made possible by cheap energy.
In a profound sense, I am a product of globalization and it’s hard to knock something that created you. But I have never been indifferent to the rather mixed results that globalization has wrought in socio-economic terms. When it comes to globalization, I am more a critic than a fan but I do have feet in both camps (okay more like just a toe in the fan camp). But this post isn’t really about that subject because frankly that aspect of globalization might take a year or more to write. This post considers if we have reached the end of globalization as political force as the world economy tumbles.
One of the dramatic developments this weekend was the failure of Nicholas Sarkozy to get the European Union to act in concert over the spreading financial contagion in European capital and credit markets. By Monday, it was clear that member states would act in their own self-interest as Germany, the largest economy in the Eurozone, acted to save its banking system unilaterally. This is not without historical precedent. One of the lessons of the Great Crash of 1929 was that in the midst of that great economic crisis, countries generally retreated from the world economy enacting all sorts of trade barriers that ultimately prolonged the Great Depression. Lessons were learned and a system after the Second World War was put in place to ensure global dialogue and cooperation in times of economic crisis. The Breton Woods agreement, the World Bank, the IMF, the OECD, the European Union and GATT-WTO (from the Cancun to the Uruguay to the Doha rounds) are all part of this system. And this system is certainly under duress. Mention the term WTO in a leftist circle and watch the epithets flow. American conservatives aren’t too fond of the WTO either seeing everything as some conspiracy towards world government. The more sane among us, of course, can point to pluses and minuses. Economics is, after all, about trade-offs.
My own view is that globalization is ultimately tied to energy. If we can’t solve our energy crisis then it is likely not going to be a model going forward simply because it can’t. To move what we what we move across the global simply requires cheap energy. And corporations who have fashioned a global supply chain are likely to reconsider that move as energy costs surpass labour costs. I don’t think we have reached that point and I’m not sure we will in my lifetime but I am pretty sure that the peak oil phemonenon will lead to a new economic paradigm, one more based on regionalism than on globalism, a continental shift if you will. And it’s quite possible that the profound economic changes as yet unleashed will recreate the political map of the world. Paul Saffo, a Professor at Stanford and a futurist, for example argues that there is a one in two chance in that by 2050 the United States will no longer exist as a unified political entity having broken up to supra-regional city-states.
Today Carl Mortished in the Times of London too reflects on why globalisation will yield to regional fiefdoms. That article is below the fold and well worth reading.
While we watch the grotesque drama of the global banking system slashing its own wrists, the real economy has just arrived at outpatients with headaches. There is tummy upset in the West, while a mysterious rash has broken out in the East.
In China, steelmakers are in deep trouble, the Olympics are over and the building sector, inflated by huge injections of public money, is subsiding. The symptoms of too much capacity and too little demand are beginning to show up in disputes with iron ore suppliers and sudden export surges to the United States as the Chinese resources industry chases dwindling demand for metal in Western markets.
The price of steel is tumbling worldwide as construction markets sag and motor manufacturers cut volume targets. ArcelorMittal, the world’s biggest steelmaker, has cut back production from Kazakhstan and Ukraine, big steel exporters, by up to 20 per cent. In London, the price of steel billets on the London Metal Exchange, a gauge of the temperature in the Asian and Mediterranean construction markets, has fallen by 60 per cent since July. Corus, the Anglo-Dutch steelmaker recently acquired by Tata, of India, gave warning this week that European markets were soggy.
In the past China might have muddled through a period of soggy markets, grabbing market share from rustbucket American and European steelmakers. They could shift product at prices that barely cover costs while blustering their way through the protests and anti-dumping litigation. China had the edge on costs with a combination of cheap labour, cheap raw materials and cheap transport. It could always rely on steel consumers to help to fight its corner: Motown liked cheap steel, just as the rest of America liked $10 T-shirts, inexpensive laptops, toys and furniture.
The world has changed – the global mining oligopoly has pushed through swingeing iron ore price increases, tripling the price of ore, and coking coal has surged as well. Fuel and transport costs have taken their toll and China can no longer assume that it is competitive. In the case of heavyweight, low-added-value building materials, it is a moot question whether China can ever again be a competitive and profitable exporter.
You can sense China’s pain in the disputes erupting between steelmakers and their suppliers. Indian iron ore producers complain that Chinese buyers are demanding price discounts and refusing to lift cargoes. The Chinese have suspended imports of iron ore from Vale, the Brazilian miner, in protest against the latter’s attempt to impose a second price increase. Add rising Chinese wages to the equation and China’s competitive edge looks rusty, indeed. A decade of restructurings, bankruptcies and mergers has transformed the American and European steel industries into much leaner, profitable producers, some of which have become cogs in the machines of rival Indian metal merchants. Worse still, the US is no longer a ravenous market, looking for cheap metal. The construction industry is comatose and Detroit is flatlining – the auto industry has joined the living dead, forced to make huge cuts in capacity that may have devastating effects on suppliers.
Xu Lejiang, the head of Baosteel, recently predicted a contraction in China’s steel output, a recognition that it was internal markets that would drive the Chinese industry in future and post-Olympics. That would mean more modest rates of growth. The interesting question is to what extent the loss of competitiveness is part of a wider structural change in world markets.
Within the world of logistics, the signals that moderate traffic from Asia are turning amber and, in some cases, red. DHL, the air freight and logistics operator, is hearing a new message from its Asian customers: where manufacturers were once concerned only about speed and efficient transport from Shanghai and Shenzhen to Los Angeles, London and Frankfurt, the present priority is proximity to markets.
According to Scott Price, chief executive of DHL in Europe, the global supply chain is in turmoil. Where manufacturers previously would think nothing of shipping finished goods from China to the United States and Europe, they are now looking for shorter supply chains. DHL is faced with upheaval as its clients rip apart a logistics and supply chain crafted over the past decade that was based on low-cost transport.
Mr Price reckons that the world is moving from globalisation to regionalisation. In a recent business review with high-tech companies, the customers said that rather than supply out of Asia, they were looking at assembly in Europe.
Foxconn, a Taiwanese electronics company that makes Nokia and Acer brand handsets and laptops, caused uproar this year when rumours circulated in the Czech Republic that a large PC plant was to be relocated in Hungary. In fact, Foxconn has been enlarging its footprint outside Asia, having bought assembly plants in Mexico and Hungary from Sanmina-SCI. It is shifting production out of the hotspots on China’s eastern seaboard to remote provinces in northern China, while expanding assembly on the edge of European and North American consumer markets.
For DHL, that means less intercontinental freight as companies change the way in which they do business. It means product assembly close to consumer markets and the need to create new logistics hubs. According to Mr Price, the largest air freight lane last year was from China to Mexico: “Four to five years ago, nobody would have questioned their assumptions about oil. Now the price of oil forms the basis of big decisions about where to locate a factory.”
The price of oil is tumbling and it could fall farther, but it is too late to prevent a fundamental shift in the pattern of global trade towards regional fiefdoms. The cost of producing oil beyond the massive reservoirs of Arabia has reached levels that are two or three times the long-term average price of $20 a barrel that was considered the norm in the 1990s. Production of iron ore is in the control of a de facto cartel and if Opec is not in control of the oil price, non-Opec producers have lost the means to challenge Opec with alternative supplies. If the oil price does collapse, it will be a short-lived respite before a renewed and more vicious upward spiral.
We are moving to a world of greater protectionism, where resources are jealously guarded. It will be a world where the cost of materials and fuel is no longer taken for granted and forms as large a part of strategic planning as the cost of labour. For several decades it was fashionable to say the world was getting smaller.
Now, the distance between us and our trading partners appears to be widening.
There is a mad dash for resources, witness the US in Iraq and China in Africa for example. There is also the formation of a new political axis of energy producers seeking great global or regional clout. The happy troika of Putin, Chávez and Ahmadinejad is one of these though this group also includes a number of smaller players but it is definitely a growing force in geo-politics and worrisome given Putin’s willingness to use energy as a weapon, Chávez’ mental instability (he is clearly bi-polar) and Ahmadinejad’s rather disturbing rhetoric on a variety of topics. It’s plainly evident that American power is on the decline with its economy no longer able to support a far flung empire of military outposts the world over. In short, we are at the start of a transition period towards a new world order.
It turns out Dick Cheney et al’s Project for a New American Century was nine decades off.