Category Archives: Globalization

The Post-Zoom World

In March, as much of the country was shutting down to slow the spread of COVID-19, I attended an annual conference. Instead of meeting in Charlotte, our association convened on Zoom. The president’s thoughtful address came off flawlessly. I delivered a paper, moderated a session, and saw a dozen interesting presentations, each followed by animated discussion. By workaday measures, our conference was a great success.

Yet for me, it wasn’t successful at all. I ran into no one in the hallway and met no one for a drink. I had none of the unexpected encounters that make academic conferences worthwhile, and came away with no great inspirations for new projects. And I had very little opportunity to renew ties with friends and colleagues, some of whom I routinely encounter at conclaves such as this. Our conference was less a gathering than a business meeting that just happened to be online. I promise that if we can manage to pull off our next one in person, I will never complain about hotel coffee again.

So when I hear the claim that COVID-19 will change something or other forever, I’m skeptical. Yes, plenty has changed for the time being: road warriors and bucket-list travelers are stuck at home; shopping malls are silent; fine restaurants are reduced to serving take-out; most people are working remotely if they’re lucky enough to be working at all. Some airlines and department stores may die, the gig economy doesn’t seem so cool, and would-be hoteliers have learned that buying a house to rent out on Airbnb isn’t a sure-fire bet.

Yet the fact that we’ve learned new ways of living doesn’t mean we won’t go back to the old ones. Watching travel videos isn’t much of a substitute for being there. While shopping malls were in trouble long before COVID-19, Amazon.com, for all its brilliance, has not figured out how to turn online shopping into a fun social experience. Spending big bucks to carry out a meal in a plastic bag provides the same calories and taste sensations as dining in the restaurant, but it doesn’t provide the same pleasure. After years of complaining about their long commutes, many teleworkers are champing at the bit to return to the office because, well, working alone at home leaves them no office mates to complain to.

My bet is that after we eventually ease out of social distancing, the post-Zoom world will be a lot less different than we might expect. Yes, some of our familiar shops and eateries will have vanished, but the empty spaces they will leave behind will rent for less, offering opportunities for entrepreneurs. Yes, we’ll be wearing face masks on planes for a while, but competitive pressures will drive airlines to offer low fares, and many of us will choose a middle seat in sardine class to save a few bucks. Some big banks will take a beating, but then they’ll go back to packaging speculative loans into incomprehensible securities, because that’s what big banks do. And yes, firms will pay a bit more attention to the resilience of their supply chains, but globalization won’t be put back in a bottle. If anything, COVID-19 has reminded us that much of what matters is indifferent to borders and to national identify, whether we like it or not.

No, the Coronavirus Won’t Kill Off Globalization

The spread of COVID-19 has brought much commentary about the impending end of globalization. While the virus has indisputably disrupted the world economy, I think that many of the claims about its impact on international trade are overblown. Globalization is far from dead. Rather, it is changing in ways that were already apparent well before COVID-19 appeared in Wuhan last December.

When people talk about globalization, they often have something specific in mind — the long value chains that have reshaped the manufacturing sector since the late 1980s. These chains emerged after the development of container shipping, falling communications costs, and more powerful computers made it practical to divide a complex production process among widely dispersed locations, performing each task wherever it is most cost-effective to do so.

Value chains underlay the torrid growth of international trade in the final years of the twentieth century and the early years of the twenty-first. During those years, trade grew two or even three times as fast as the world economy, mainly because of increased shipments of what economists call “intermediate goods,” items made in one place that are being sent elsewhere for further processing. I refer to this period as the Third Globalization, because it was distinctly different from other periods — the decades before World War One, the years between 1948 and the mid-1980s — when international trade and investment grew rapidly, but international value chains were uncommon.

Many companies decided where to locate various parts of their value chains based on production and transportation costs. But over time, complicated long-distance value chains often proved to be less profitable than they had imagined. As freight transportation became slower and less reliable, and as earthquakes and labor disputes resulted in goods not arriving on time, executives and their shareholders became more attuned to the vulnerabilities. Minimizing production costs ceased to be the sole priority. 

Companies have taken a variety of measures to reduce risks in their value chains. They are keeping larger inventories in their warehouses, producing critical components at multiple locations rather than in a single large plant, and dividing exports among several ship lines and sending them through different ports. All of these measures help limit losses when value chains malfunction. But all of them make international sourcing more expensive.

For most of the past decade, international trade has grown more slowly than the world economy, reversing the trend of the previous sixty years. Greater care when it comes to arranging value chains is one reason why. COVID-19 offers further reason to be careful. But it is not likely to cause manufacturers, wholesalers, and retailers to give up on globalization. The alternative, relying on a purely domestic value chain that can be interrupted by a flood or a fire, might create risks rather than contain them.

 

Slow Trade Growth is the New Normal

The World Trade Organization forecast on April 2 that merchandise trade will grow a modest 2.6 percent in 2019, with risks to the downside. The outlook for next year is only slightly better, with trade projected to expand 3 percent. These are disappointing numbers: international commerce, the WTO anticipates, will expand no faster than the world economy this year and will be only slightly more robust than global GDP in 2020.

The WTO’s director-general, Robert Azevêdo, blamed the unhappy news on uncertainty caused by protectionist bluster. “Of course there are other elements in play, but rising trade tensions are the major factor,” he told the press. But Mr. Azevêdo may be overstating the case. There is reason to think that slow growth in goods trade is not an aberration caused by protectionist rhetoric, but is the new normal, due to factors that have nothing to do with trade wars.

For most of the past half-century, exports and imports grew far faster than the world economy. Merchandise trade, less than one-third of the world’s GDP in the 1980s, climbed to more than half in 2008 as China developed into the world’s workshop. China’s factories consumed vast quantities of imported fuel, ore, and chemicals; shipped a quarter or more of their output abroad; and then imported waste paper, used electronic equipment, and scrap metal for recycling into yet more manufactured goods.  Each part of this cycle involved long-distance trade, which is why demand for container shipping increased an average of roughly nine percent per year.

Exports and imports of goods plummeted in 2009, and they have grown since then on a much lower trajectory then before. It seems likely that in the years ahead, international trade will grow more slowly than the world economy as a whole, a distinct divergence from the pattern since World War Two.

Several forces are driving this trend. One is a change in consumer behavior. As personal incomes rise, households tend to shift their spending away from physical products toward services and experiences, from education and medical care to adventure vacations.  Call it the Marie Kondo effect, the belief that having things brings us less joy than doing things. This shift in spending patterns is positive for trade in services, but it is unambiguously negative for merchandise trade.

Another cause of slower growth in trade is a reconsideration of global supply chains. Starting in the late 1980s, lower transport and communications costs and better information technology made it practical for manufacturers and retailers to stretch their supply chains around the globe in search of lower production costs. Intermediate goods—things made in one country and shipped to another for further processing—account for a large share of all merchandise trade.  But in recent years supply chains have become more costly and less reliable. Importers have responded to increased risk by keeping more inventory on hand and by building redundancy into their supply chains, measures that make trading more expensive.

A third factor weighing on trade is automation. The great relocation of factory production to China, Mexico, and Eastern Europe since the early 1990s was, in good part, a search for lower labor costs. But production labor matters far less than it used to as robotics and artificial intelligence enable computers to take on more of the work. Additive manufacturing, more widely known as 3-D manufacturing, lets manufacturers make some goods with very few workers on the factory floor, and important experiments are underway to produce some types of apparel and footwear in highly automated factories.  These developments are making it feasible to locate factories near end markets rather than near cheap labor, and they are likely to suppress the growth of international trade.

All this means that cross-border movement of goods will probably be far less buoyant in the years ahead. Services and ideas, not things, account for a growing share of global commerce; since 2012, exports of commercial services have grown twice as fast as exports of goods. Ship lines, ports, and railroads that have invested in expectation of an every-increasing volume of containers may need to adjust their expectations.  Even if protectionist pressures recede, the next stage of globalization will be quite different from the last one.

Payless: A Brief Obituary

Back in 1956, there were a couple of events that helped shape the course of globalization. One, about which I wrote in my book The Box, was the first modern containership voyage. This would eventually lead to the behemoths, some carrying more cargo than 10,000 full-size trucks, that move much of the world’s trade today. The other was the most prosaic development one could imagine, the opening of a shoe store in Topeka, Kansas, by two entrepreneurial cousins, Louis and Shaol Pozez. Sixty-three years later, that company is about to go out of business, the victim of the globalization it played a small role in bringing about.

My family knew both Pozez families and we shopped in their store. Payless-National, as they ambitiously called it, aimed to offer quality shoes at discounted prices. It did so by keeping costs low. The floor was covered with linoleum, not carpet, and the wooden shelves weren’t even painted. Payless laid out its merchandise in shoeboxes. Sales clerks were few; customers were expected to find their size and try on the shoes themselves. In return for putting up with these rather austere conditions, shoppers could buy two pairs of shoes for five dollars.

The Pozez cousins were able to undercut their competitors thanks to a series of court decisions in the early 1950s that effectively prohibited manufacturers from fixing retail prices. Importing was not part of their strategy: the United States imported very little footwear in 1956. Although shoes cost far less to make in many other countries, the United States still had a vibrant shoemaking industry, with 1,900 factories employing more than a quarter-million people in places like Endicott, New York, and St. Louis, Missouri. Thousands more people were employed in tanneries and in factories that made synthetic shoe materials.

But while making footwear provided plenty of jobs, those jobs came at a cost. By today’s standards, shoes were expensive. Men’s dress shoes from Florsheim started at $18.95 a pair. That’s about $170 in today’s prices—which is far more than an equivalent shoe from Florsheim costs today. A pair of men’s loafers from Sears for went for $8.65, or about $77 in today’s money—nearly twice the price of the loafers available right now on Sears’ website. StepMaster children’s shoes cost $5.50 a pair. No wonder Payless’s offer of two pairs of shoes for five dollars seemed like a good deal to a bus driver or factory worker earning two bucks an hour. Payless became a huge success, operating thousands of stores. It was purchased by a big department store chain in the 1970s, then spun off as a publicly traded company, and  eventually ended up in the hands of private equity funds.

Footwear manufacturing has proven difficult to automate, making labor costs the single most important factor in choosing production locations. As factories in low-wage Asian countries filled millions of containers with cheap plastic and synthetic shoes and shipped them across the pacific at only a few cents per pair, the U.S. shoe industry couldn’t come close on price; today, about 98 percent of the shoes sold in the United States are imported, mainly from China. To keep its lead in the discount shoe business, Payless became one of the largest shoe importers. For it, as for many other companies, globalization was not a choice, but the only alternative.

What killed it, at the end, was the same thing that made it a success—the constant quest for lower prices. According to the Bureau of Labor Statistics, the average consumer price of footwear has gone up all of 8 percent over the past 25 years. Rent and workers’ wages, meager though those may be, have been rising much faster, squeezing shoe retailers’ margins. In that environment, even globalizers can end up as road kill.

The Language of Globalization

I speak German, or at least I used to. I believe — I hope — that the decline of my fluency isn’t a sign of advancing senility. Rather, I think, it’s an artifact of globalization.

This has been on my mind since my recent appearance in a series of excellent programs about containerization broadcast by Austrian Radio. The host, Anna Masoner, speaks English better than I do; I offered to be interviewed in German, but she interviewed me in English and then arranged for a voiceover translation. Once I listened to the programs, I was very glad she had done it that way.

It’s not just that my German is more or less German German, a far cry from the language spoken in Austria. The more serious problem with my speech is that I use German words that native speakers have ditched for English alternatives. As a result, I feel a bit like a character out of Shakespeare walking onto a twenty-first-century stage. My language is fine. It’s just that people don’t talk that way any more.

It seems that every business in Germany, Switzerland, and Austria now has a Marketing Abteilung; words like “Vermarktung” and “Vertrieb” seem to have fallen into disuse. I know of one company that advertises its interest in making “Investments in Wirtschaft und Logistik,” and another that deals with investors through its “Investor Relations Abteilung.” If a firm wants to start selling abroad, it opens up an Import-Export Geschäft; “Einfuhr-Ausfuhr” apparently is no longer used. When employees want to talk about how the business is doing, they have “ein Meeting.” Younger people might be more inclined to have a “Meetup.” Whether that Meetup is masculine, feminine, or neuter I have not the slightest idea.

English, of course, is the language of globalization, so I can understand all this anglicized German when I hear it or read it. But it’s not so easy to speak it correctly if you don’t spend a great deal of time in German-speaking Europe, soaking up the latest linguistic advances. In effect, globalization has devalued my language skills. I’m glad that when ich wurde interviewt by Ms. Masoner, we spoke English.