Globalisation of trade over the last 20/25 years was lauded as the way to lift people and nations out of poverty. And it did. It also, however, threw pockets of wealthy countries into deprivation when jobs were offshored. Is globalisation now under threat?
Part of the great globalisation was the opening of China in the 1990s, making it feasible to manufacture almost everything there (and increasingly also in other countries in Southeast Asia) for a fraction of what it would cost to make it in the wealthier countries of the West. With faster communication (internet/mobile telephones) and faster transportation networks many basic level service- and manufacturing jobs moved to countries with lower labour costs, at times choking low skilled employment in the West.
Globalisation of trade created globalisation of labour and, at least in economic theory, it looks very neat to have low skilled labour in low-cost countries, leaving high skilled jobs for those in wealthier nations and giving able people the chance to move elsewhere for better jobs. Ester Duflo - professor of Economics at MIT – in her book ‘Good Economics for Bad Times’, for which she won a Nobel Prize, argues the opposite. She states that people are by nature ‘sticky’. Sticky in where they live and how they live and do not easily transfer into higher skilled jobs or easily move physically to where the jobs and opportunities are. Hence if the area they live in was negatively affected by globalisation (job drainage), the area would most like become poorer as people stick around.
But, on a positive note, from an inflation point of view, shifting manufacturing to lower cost countries also led to lower prices for consumers everywhere and it seemed – at the time - that some localised unemployment was an acceptable price to pay for a steady stream of low-priced goods and services (think fashion, computing, car parts, household goods), keeping inflation low. Besides, the constant threat of jobs moving away, also made sure wages – certainly for low skilled labour at home – did hardly rise. In fact, overall wage growth stayed around 2% on average over the last 10 years. Well in line with inflation.
The Pandemic spanner in the globalisation and inflation wheel
So, the big shutdown of global trade during the pandemic, made nations aware of their dependence of just-in-time deliveries from low cost to high cost-countries. Because, once people could step out of their houses again, they wanted to buy a lot of things and demand for goods and services exploded. The supply side was not ready. Prices had to go up. But crucially, importing countries also found out how, in certain cases, they were at the back of the line for the things they needed and that - apart from having to pay higher prices - they could not even buy the required goods. A poignant example of this was the great shortage of computer chips and countries having to beg the biggest global manufacturer of chips, Taiwan Semiconductors, to sell to them. Not a great position to be in. Better to produce highly necessary goods at home. And in fact, to have a homegrown semi-conductor industry has become a key policy objective for both the US and Europe, reversing an important part of the global trade.
Another issue where globalisation has created an unwanted dependency is with rare earths. China, the world’s biggest exporter of rare earth, which is used in everything from fighter jets, mobile phones and computer hard drives to electric cars, has threatened to reduce or even totally ban exports to the US. The US, having abandoned its own rare earth mining activities about 20 years ago as it was easier and cheaper to buy it directly from China (globalisation at work), is now wanting to revive its mines in Texas, Wyoming and Nevada to reduce its dependency on China.
Other, equally urgent examples of uneasy dependencies, are the lack of grain due to the war in Ukraine (and the Ukraine understandably holding back grain reserves for feeding its own population), leaving countries fully depending on grain imports scratching their heads as how to avoid being left hung to dry – foodwise that is – in the future. Oil and gas are another painful reminder how much power other countries have over our daily lives and a great reason to be more self- sufficient.
So, did the pandemic and its economic consequences change the trajectory of globalisation? Do we feel better and safer when we make things at home (if we can) instead of delegating everything to others? Absolutely. Esther Duflo’s argument against the great benefits of globalisation – once a very unpopular stance – may be heard with more urgency in Brussels, London and Washington today.
Links & Sources:
https://economics.mit.edu/faculty/eduflo
https://www.epi.org/nominal-wage-tracker/
https://www.talksforteens.com/...
https://www.cnbc.com/2021/04/17/the-new-us-plan-to-rival-chinas-dominance-in-rare-earth-metals.html
https://ec.europa.eu/commissio...
https://www.talksforteens.com/finance/give-us-today-our-daily-bread-why-wheat-prices-matter
Other articles that may be of interest
Explore others in this topic or return to the index.
