Friday, May 30, 2008

The Fraying of Globalism

Abandoned Wal-Mart, Beaver Dam, Wisconsin

Over eight months ago, I made a promise to myself that if I needed to buy any large or significant household item, I would buy it used, as part of my anti-materialist, anti-globalist, environmentally friendly personal commitment. Therefore, a couple of months ago, I bought a concrete weight set on Craigslist. While driving back to my house, I noticed a garage sale in progress, so I stopped, as I was (and still am) looking for a good, inexpensive, sturdy dining table and chairs. Unfortunately, I had found this particular garage sale too late to score a dining table, but they did have a collection of cheap paperback books which I perused before buying a few.


One of the books I bought was The Lexus and the Olive Tree (Thomas L. Friedman, Anchor Books division of Random House, Inc., April 2000). The book purports to examine the impact of globalism (the Lexus is used as a metaphor for this), and the tension between neoclassical, “free-market” economic globalism and the local economies and cultures which it supplants (the olive tree being the metaphor for these local economies and cultures). I tried skimming through it, but found myself in violent disagreement with what I perceived to be its premise: that globalism, even with its disadvantages and side effects on local living, is still a good thing, and that it should be embraced. I believe that the opposite is true: that economic globalism has stripped many local peoples and local cultures of their means of being self-sufficient, and has instead forced most of the world's people into dependence on and slavery to an economic system which actually benefits only a few rich oligarchs. And now the signs suggest that the system is breaking. (If anyone reading this thinks that I have misinterpreted the book's premise, or that the book's author is correct in his premise, feel free to comment. I have to admit that I didn't have the patience to force myself to finish the book.)


There are abundant signs that the globalist system is beginning to run into serious trouble. The globalized model on which most agribusiness is based is a case in point. Things got interesting recently for companies such as Mahatma Rice (owned by Riviana Foods, which in turn is owned by Ebro Puleva, S.A. http://www.riviana.com/who_we_are.html), whose business models depend on growing rice in Third World countries where land and labor is cheap, then shipping it to markets in the First World for sale at an elevated price. Recent crop failures and the escalating cost of food, coupled with a worldwide grain shortage, have induced countries such as India and the Philippines to stop exporting rice. This past winter, the Chinese government ordered a halt to coal exports because of record low temperatures and snowfall. And China may well become a net coal importer this year because of the country's generally increasing need for electric power to support its continued industrialization.


But a prime example of a globalist economic system that may get into trouble very, very soon is the big-box retail chain. This week, on the Oil Drum and Energy Bulletin websites, I found a fascinating article from the Canadian newspaper The Globe and Mail. The article, “High Oil Prices Will Hurt Trade, Report Says (http://ctv2.theglobeandmail.com/servlet/story/RTGAM.20080527.woileconomy0527/business/Business/businessBN/ctv-business),” was cited in at least one other newspaper. It described recent research on the effects of high oil prices on the global economy. The research was performed by chief economist Jeff Rubin and senior economist Benjamin Tal, of CIBC World Markets. Their conclusion was that the high and escalating price of oil was beginning to erase the price advantage enjoyed by businesses who established their manufacturing operations in Third World countries with cheap labor rates and weak environmental regulations and who shipped their finished products to the markets of the First World. A case in point: the cost of shipping a standard 40-foot container from Shanghai to the U.S. East Coast has risen from $3000 in 2000 to $8000 this year.


As the cost of transport rises due to the rising cost of oil, the wage advantage enjoyed by globalist big business is steadily eroded. Messrs Rubin and Tal note that the high cost of shipping effectively imposes a “tariff” of over 9 percent on goods imported into North America from China. This reverses the efforts of multinational corporations over the years to persuade governments of nations to remove tariffs and other legislated trade barriers. Unfortunately for the globalists, there is no way to remove this new and growing “tariff.” If the price of oil rises to $200 per barrel, the effects of trade liberalization policies will be entirely wiped out.


This has already begun to affect the Chinese steel industry, which is now facing stiff competition in North America from a revitalizing American steel industry. And the Chinese are at a double disadvantage, since they have to pay for the cost of transporting raw materials from other nations to Chinese factories, then pay again to ship finished goods to foreign markets. But steel is just the leading edge of a trend. A time will come when cheap foreign furniture, toys and produce are a thing of the past, as the cost of transport becomes an ever-larger part of the total cost of goods sold in the United States. The near future does not look good for big-box businesses such as Wal-Mart, Cost Plus, Ikea, Home Depot, Fred Meyer, Target and others which have driven local retailers out of business by buying cheaply manufactured goods in bulk from overseas factories and underselling their competition. Nor does the future look good for the poor people who have become dependent on getting cheap foriegn-made goods from these stores. These stores may not be with us very much longer.


Our lives and livelihoods are about to become a good deal more local. Even regional trade may soon begin to break down beyond a certain distance. Another fascinating article I read this week was about the breakdowns already taking place in the long-haul trucking business (“Soaring Fuel Prices Take A Withering Toll on Truckers”, New York Times, 27 May 2008, http://www.nytimes.com/2008/05/27/business/27ship.html?_r=3&oref=slogin&oref=slogin&oref=slogin). According to this article, more than 45,000 big rigs have disappeared from U.S. highways since last year. And air freight carriers are in even worse trouble.


I believe this fraying of globalism will accelerate rapidly over the next several months, rather like a hemp rope being dragged across sharp rocks. If you're an employee or holder of stock in a big-box chain, you may want to start making other arrangements. Learning to do those things that are necessary to re-build local economies is a good place to start. Start learning necessary skills that are easy to apply locally and are useful to society. And it is time now to start doing difficult things, and to get used to doing difficult things on a regular basis, so that when you are forced to do a physically difficult thing, you are not taken by surprise.


This week, where I live, the highest gasoline price I saw was $4.47 for premium unleaded at one station that I pass on my way to and from work. I have seen an almost literal explosion of bicycles on the streets, in spite of our typically rainy weather and the large number of hills. I have also seen middle-aged men commuting on skateboards (I almost took a picture of one). During my commute to work, I have noticed that the bike racks on the buses are increasingly filled to capacity, forcing cyclists like me to ride farther to get to work. Today the driver of the bus I took rode up to the bus stop on a bicycle. A co-worker, inspired by my cycle commuting example, rode into work for the first time in over a decade. He is over 60 years old and slightly overweight, and he rode on a day that turned rainy in the afternoon, and I think that dissuaded him from trying it again.


Rice is available again in the stores, though it is 10 cents per pound more expensive than it was a couple of months ago. Lentils and dry peas are also more expensive. I will be planting more vegetables this weekend. One day, I'll write a post about my gardening adventures (I'm very much a newbie at this).


P.S. If you want to see the CIBC reports referenced in the news articles cited above, here are some links: “The New Inflation,” http://research.cibcwm.com/economic_public/download/smay08.pdf; and “Will Soaring Transport Costs Reverse Globalization?”, http://research.cibcwm.com/economic_public/download/feature1.pdf.

2 comments:

Pete Murphy said...

First, I'd like to make a couple of points regarding your excellent post:

1. I wouldn't bank too heavily on the price of oil making a big difference in our trade deficit. Exporters will soon respond by cutting other costs. They won't sit idly by and watch their share of the U.S. market dry up. Oil prices will have some effect, but not as much as we may hope.

2. It's a mistake to believe that low wages in 3rd world countries is what drives our trade deficit and loss of manufacturing jobs. The correlation with low wages is weak. Of our top twenty per capita trade deficits in manufactured goods, only 2 of the top 10 are with relatively poor countries - Trinidad and Israel. (Yes, with "per capita purchasing power parity" of only about $10,000, Israel is relatively poor.) Only 7 of the top 20 are with poor nations. However, there is a very strong correlation with population density. Eighteen of those top twenty per capita deficits in manufactured goods are with nations at least twice as densely populated as the U.S.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Even more revealing than the per capita trade deficit data I mentioned above, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat "spammish" nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, Five Short Blasts

TH in SoC said...

Thanks for your comment. I apologize for not responding earlier; I've been somewhat buried by work and other things. I had not heard of Ricardo's principle of comparative advantage. There are a few considerations, however, that I'd like to mention:

1. The price of oil is in the process of growing exponentially in absolute terms, and as a percentage of national expenditures. And other resources used in manufacturing of exported goods are now experiencing their own Hubbert peaks. The price of goods imported into the US is therefore rising, and since the US buys so much on credit, we need to rely on the goodwill of foriegn creditors in order to fund additional purchases. That goodwill is running out, as it is becoming apparent that we don't have the means to repay our debts.

2. Measuring a country's prosperity on a per capita basis can lead to false conclusions. For instance, a country can have a very small, obscenely rich upper class ruling a very, very large number of very, very poor people. If the ruling class owns the means of industrial production in that country, and if the poor are largely employees of the rich, the industries of that country have a competitive advantage in commerce, based on low employee costs as a percentage of the total cost of manufactured goods. I would suggest that this is the case in China, Russia, India, and many other rapidly industrializing Third World countries. Measuring the wealth of such countries on a per capita basis masks the true extent of the effect of their low labor costs.

3. Because the cost of petroleum-based transport is growing, both in absolute terms and as a total fraction of the cost of long-range commerce, globalism as now practiced is in danger. When the cost of importing something from beyond a certain range exceeds the cost of producing that thing locally, long-range commerce at that range will cease. The CIBC articles focused on trade with China as a case in point, but the same principle applies to long-range importing of goods from any country. The problem in the US is that the architects of the present globalist system are resisting any attempt to set up a safety net of local manufacture and trade. Wal-Mart and Cost Plus will not willing cede the economic field to local businesses. In one city I know, a locally owned mom-and-pop gourmet coffee business was threatened with termination of its lease by the property management company that oversees the shopping complex in which the coffee business is located. While the property management company was seeking to evict the mom-and-pop store, they were also trying to bring in a Starbuck's or It's A Grind chain store to replace it. The big-box retailers use city councils, zoning changes and planning commissions as a tool to facilitate their growth and to eliminate their competition, even though they are about to be on the endangered list.