Globalization and high energy costs

Globalization probably caused the record energy prices, especially in transportation fuel, we saw in the 2007 and 2008. In fact, transportation costs became so high that the threat of de-globalization became a distinct possibility.

The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing that carry a high ratio of freight costs to the final sale price. But a new report has determined that higher energy prices are affecting transport costs at such an unprecedented rate that “the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.

As transportation costs rose, the one main advantage of continued wage arbitrage with China began to evaporate. Even though the Chinese could build the products cheaply, what good would it do foreign companies who were spending exorbitant amounts on shipping?

Transportation fuel costs have dropped significantly since 2008, but the discussion about globalization has taken on a negative turn in 2009. The recent Davos forum saw a number of high-ranking financial industry and political leaders questioning the future of globalization and unconstrained capitalism.

“Defenders of free markets find ourselves in the unusual position where we have to accept and acknowledge that unconstrained capitalism is actually destructive,” said Leo Tilman. “How do we balance need for economic dynamism with a viable economy and proper regulation?”

One factor fueling the debate about the problems of globalization relates to the tough time western workers are currently experiencing. Wage arbitrage has made enormous profits for companies, but had done little to improve wages or the standard of living of workers in developed nations.

The gap between rich and poor has never been greater than it’s become during the age of globalization, which took flight in earnest in the 1980s. In that time, the divide between haves and have-nots has become canyone-esque. Of course other factors are at play also, but the effects of globalization on certain countries as been demonstrably negative.

Of course inequality is nothing new, and globalization isn’t the sole cause of it, but it can’t be overlooked as a factor. For Americans, globalization has been a mixed bag.

The main benefits of globalization for Americans are in the areas of cost and choice. You can shop in any American store and find a dizzying array of products, with many at extremely cheap prices. However, with unemployment at extraordinarily high levels, these cheap prices have come with a high price tag for the American worker. With more unemployed people, low cost products aren’t exactly flying off the shelves.

Barack Obama and a new era of protectionism

President Barack Obama has already been accused of espousing protectionist views. China protested about a “Buy American” clause in his Stimulus plan. The statement was later watered down to appease critics.

Even Canada, America’s largest trade partner, is worried about protectionism from the new administration. Although Canadian leadership left a recent meeting with Obama convinced that he wasn’t planning on re-drafting the NAFTA agreement, there are still concerns that American companies are seeking protectionist help under the guise of “security and safety concerns”.

“One of the things I’m beginning to learn in trade matters is one of the tricks of the trade. You can get an industry … come forward to their government and say, ‘As a safety issue, or as a security issue, we need to demand this from Canadian products coming in.’ Sometimes that can be a bona fide safety and security issue. A lot of times it’s what we call a non-tariff barrier and they will use that,” Mr. Day said.

Obama has only been in office for less than a month, so his position on the issues of globalization aren’t particularly clear. One thing is certain, though. He won the election in large part due to his appeal to American workers who are hoping his administration will protect their interests. Whether that happens at the expense of globalization remains to be seen. Workers in the U.S. and around the world are extremely interested in what happens next with the global economy. One thing is clear, never before have the fortunes of so many people worldwide been so intertwined economically. When things are going bad, that doesn’t necessarily feel like a great thing.

Disadvantages of Globalization

1. For developed economies, globalization means a loss of higher paying jobs as companies seek the cheapest skilled labor at the lowest cost.
2. The threat of jobs being offshored is enough to keep morale low in many industries. People who are walking on pins and needles because of the threat their job will be moved to another country are not the most confident consumers around.
3. The new workers in new counties may not have the same skill levels as the workers they replaced. In that case, product quality suffers.
4. Globalization also represents the transfer of societal ideals to companies who may not be ready for massive changes. In extreme cases, this could result in social instability.
5. A real threat exists that workers in less developed countries might be exploited by foreign companies. These companies are attempting to make the maximum profit and probably won’t pay or treat workers as well as they do in their home country.
6. Transportation costs become more expensive as products are shipped to countries from much further than they used to be.
7. Energy consumption in developing markets increases, which puts pressure on domestic supplies and pricing. Energy costs go up for everyone as more people compete for the resources.

Pros of Globalization

1. Workers in less developed countries should see an increase in wages and living benefits. If they do, their rising standard of living should help them consume products from developed nations. A virtuous circle can theoretically be created by a whole new middle class that didn’t exist.
2. Peace should be easier to maintain between nations as no country would remain isolated in this new world order. The relationship of China and the United States has changed dramatically as their trade partner status has increased over the years.
3. Globalization can help modernize developing countries faster. Modern ideas can be spread to the workers, who make up the social order.
4. Products can be purchased much cheaper in developing countries, which increases the lifestyle of the people. As we pay less for simple common items, we have more to spend on big ticket items, which fuel higher paid manufacturing jobs in developed countries.

When oil prices hit $150/barrel last year, many of the disadvantages of globalization seemed to come to the forefront. More countries expanding using oil based products means prices went up. Much of this price was speculation, but a large part was from the transportation of goods throughout the world. As oil hit record highs, companies looked for local suppliers in order to defray costs.

Globalization, and the role of the United States, are two of the issues that are most pressing to Barack Obama. Many of his concerns, like job creation, center around our role as a leader of globalization. If he tries to hard at protectionism, or favors certain manufacturing industries against other, chances are the US will be called on it by multiple trading partners. China, for one, has already pointedly visited the US and Europe to ask that efforts aimed at stabilizing the economy didn’t involve protectionism.

A “Buy American” clause in the proposed economic stimulus plan has already been struck down for this reason. The next several months promise to be a challenging time for developing and developed economies alike. The decisions that are made in that time-frame are bound to impact all of us for decades.