Why globalization is here to stay

Why globalization is here to stay
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It is a tough analogy to compare the words of Mark Twain that the reports of his death were greatly exaggerated with the idea of globalization. But it is so true. During the pandemic, there has been endless commentary that the coronavirus has signaled the end of the era of globalization. Just like the reports of the death of Twain, this notion is at best premature.

The commentary is based on instant market distortions and not reality. Globalization is a natural part of the human condition. It is the political, cultural, and economic version of evolution. It had existed thousands of years before Thomas Friedman popularized it for the current period. As Israeli historian Yuval Noah Harari explains in his book, “Cultures began swallowing and absorbing others from the earliest times of history.”

The analysts are questioning whether globalization will continue to be a trade force in the world after the pandemic is over. They are looking at what appears to be the risky concept of the international supply chains and just in time manufacturing, the production concept developed in Japan in the 1950s that has now been adopted around the world.

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Global manufacturing firms do not hold inventory and instead call on their partners to supply components as needed. Just in time manufacturing is far more efficient than the old process of keeping component inventory on hand, and it saves money since a firm does not need to carry, finance, and warehouse parts in inventory. However, as we have seen in China, if the supply factory is not able to ship thanks to the coronavirus, the main factory is not able to make and ship the product to customers.

The coronavirus should force industries to evaluate their supply chains. What was always apparent but ignored up until now in favor of efficiency and profits was that a company should never keep all of its eggs in one basket and never depend on only one sourcing country. But to presume that companies will totally abandon the international sourcing as a result of supply chain challenges due to the coronavirus is simplistic.

This does not make sense and would in fact hurt the United States. A pair of jeans would cost more than $300 if made entirely in the United States, while Gap sells imported jeans for around $80. That differential, like all of the differentials on imported products, goes directly into the pockets of consumers as an amazing indirect stimulus of the economy. In addition, any manufacturing that comes back to the United States would not be based on human labor, as it would primarily be done by robots.

British economist David Ricardo wrote his trade theory of comparative advantage in the 19th century, but it still holds today. A country should export products in which it has a productivity advantage and import the others. In the age of human capital, the United States has this advantage in media, services, technology, and agriculture, but not in labor intensive manufacturing. The iPhone is a great example. Just 4 percent of its cost is attributed to China, where it is assembled. Its components are from Brazil, Taiwan, Singapore, Switzerland, and South Korea. However, the majority of its cost is from design, marketing, and engineering in California.

Apple is a case of applying comparative advantage to international supply chains, but it is also an example of a critical point that most of the current doomsday commentary has missed. Globalization in terms of trade must be viewed as a two way street. It is not just about outsourcing the various components to make a product more efficiently. It is also about selling the products for which a country has a strong comparative advantage.

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Take a look at Boeing. About 70 percent of its commercial revenue comes from customers outside the United States. In a true globalization dance of interlocking needs, and partly to pacify the political constituencies in the countries buying its airplanes, Boeing sources from very many overseas factories. The basic reality is that Boeing could not exist on its domestic business alone. It needs the scale of international sales to prosper. This can be seen with other companies from Google to General Motors.

The pandemic will force trade in the context of globalization to continue to evolve. The coronavirus, along with some potential political roadblocks, will slow the pace of globalization in this era. The damage to the economy may also make the leading countries realize that globalization needs to be managed, and that free market globalization can be as socially destructive as it is financially profitable. However, the basic logic of globalization has not gone away, and the reports of its death are greatly exaggerated.

Edward Goldberg is an assistant professor at New York University Center for Global Affairs where he teaches international political economy. He is an author whose latest book “Why Globalization Works for America: How Nationalist Trade Policies Are Destroying Our Country” was out this year.