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De-Acceleration or Globalization 2.0

"The wondrous global division of labor came about in which the up-and-coming threshold countries lend money to the US to buy Chinese or Indian products..Must cut-flowers from Africa be promoted in Europe? The oil costs and climate treaties will force the inclusion of environmental costs."

The world economy plunges in the greatest problems in decades. Free trade is threatened, national influences increase and work is redistributed around the globe

By Thomas Fischermann, Ruth Heimling and Mark Schieritz

[This article published on: Zeit Online 32/2008 is translated from the German on the World Wide Web,  http://images.zeit.de/text/2008/32/Ende-der-Globalisierung.]

All certainties are now on trial in the world economy. For the first time the model of the past 25 years seems to fall into great difficulties, turbo-capitalism practiced worldwide in combination with cheap oil and vast money. In the past container ships were faster and bigger, cargo planes were enormous and trucks tightly packed without appreciable costs. Capital cleared the path in many places nearly without state controls. The world economy was fired up on all cylinders.

What is now happening? Financial institutions collapse and inflation returns. Oil is expensive and many countries expect a recession. The community of states wracks its brains about stricter rules for the credit branch. Many politicians of the West rediscover protectionism as protection of their own citizens. At the end of July 2008, negotiations on liberalized world trade in Geneva broke down. Setting a positive sign for globalization in this year of crises may be the last hope. The national egos with the egos of the US at the top were stronger than the desire for an agreement to help developing countries and prove the world economy exists for everyone.

"Globalization can be reversed," say the economists Jeff Rubin and Benjamin Tal from the Canadian investment bank CIBC. At least globalization is now becoming slower.

Barack Obama promises more protection for citizens of the US.

One thing has already happened. The world economy has run up against many limits of capacity. This is the deeper reason behind the economic crisis suddenly brewing after the New Year. Globalization opponents argue the fodder for greedy world capitalism is running low. The prices for fuels have climbed to record levels. Oil producer countries cannot or will not quickly expand their production. This is also true for staple foods like rice and wheat whose prices exploded after a series of crop failures. Metals and other raw materials for industry are becoming scarce. Many harbors, airports and roads are strained in rapidly growing economies like India, Brazil and Russia. In a second step, these shortages increase the prices of many other products, provoke inflation dangers, raise the price of life and the labor costs of low wageworkers in distant countries and make more expensive transporting heavy, bulky goods.

Is this only a temporary problem until these scarce things are replaced by others," as Michael Bordo says? "At the end of the 19th century, everyone feared the end of coal but then oil was found," the economist from Rutgers University argues.

Many of his colleagues are more skeptical. "If oil stays expensive, world trade could be greatly reduced," says Paul Krugman from Princeton University. Kevin O'Rourke, an historian and trade expert at Trinity College in Dublin, paints a gloomy future full of wars over distribution. "Sudde3nly it will be clear to many people that many dependencies could become dangerous," he says. "If we don't create a multilateral system for the reasonable distribution of oil, gas and metals, the world will head for a dangerous scenario."

Since 1950 the costs for airfreight fell almost 90 percent.

The shortages are now setting new limits to globalization. Many politicians understand this effect. For months prominent politicians in several countries and different political camps have clearly defined themselves as globalization opponents. From the US and Japan to Australia, they have blocked corporate takeovers by foreign investors in the last months or cautiously passed laws to do this in the future. The rejection of foreign trade also goes beyond the collapse in Geneva. With harsh criticism of the free exchange of goods, the presidential candidate Barack Obama distinguishes himself from his economic liberal adversary John McCain.

The presidential campaign in the US has shown that support for open trade is shaky in the most powerful nation of the world," Harvard researcher Dani Rodrik says. Under the title "The Consensus on the Death of Globalization," he describes the market-radical world trade system that arose in the early 1980s as "unsettled."

Perhaps uncertainty is so great because globalization has been advancing for 25 years. After the meager economic growth in the 1970s, the industrial countries rapidly raised the average living standard. At the same time, formerly dependent regions in the Far East, Latin America, Eastern Europe and even Africa suddenly experienced sound growth rates. These successes were also a result of very conducive circumstances for the world economy.

A decade after the oil shock in the 1970s, the price of oil fell to a regular low level. Rules for the international environment and climate were practically non-existent. Bigger ships, more powerful motors and advances in unloading made shipment by sea faster than ever. The revolution in air transport that began after the Second World War continued. Calculated over the half century since 1950, air cargo costs fell almost 90 percent.

Breakthroughs in computer science and telecommunications helped manage world networks of manufacturing firms on distant markets. Corporate managers gathered more experience and financial backers invested more willingly - and sometimes effusively - in the possibilities of the new globalized world economy. A world carousel of raw materials, intermediate products and finished products turned faster. Millions of low-wage workers in threshold countries clicked in the global production runs.

The most important thing has been the role of politics helping globalization in the last 25 years. Trade barriers fell and agreements were signed. World trade had an effective mediator in the World Trade Organization. All market openings did not happen voluntarily in these years. The World Bank, the International Monetary Fund and powerful western states forced some threshold- and developing countries against the will of their chosen representatives to a radical policy of market opening.

The financial industry invested complex products so capital could pass by borders and state regulations and hurl over the globe. In this way the wondrous global division of labor came about in which the up-and-coming threshold countries send money to the United States to buy Chinese or Indian products. Economists have estimated every American has purchased on average $4000 from China in the past ten years.

Since the 1990s governments and central banks pushed turbo-globalization on some threshold countries. These countries keep the exchange rate of their currencies low. In this way, they could flood the world with cheap products and quickly build their industry, above all the Chinese. The export surplus of the People's Republic alone amounted to $262 billion in 2007. Cheap oil and inexpensive imports from the East restrained the price inflation. The prices for clothing and shoes are practically unchanged in Germany since the middle of the 1990s. Inflation seemed defeated.

Initially businesses from classical industrial countries utilized the Asian surplus in workers and opened production sites in the up-and-coming countries. In 2007 the rich industrial countries invested $1.820 trillion - 50 percent more than in 2006. The Nurenberg company Leoni makes cable for cars and airplanes in China and Korea and Porsche manufactures parts for the Cheyenne SUV in Eastern Europe. Firms from threshold countries appear on the world market. 29 Chinese firms are already on the Fortune magazine list of the top 500 world firms in sales. The oil giant Sinopec and computer manufacturer Lenovo are among the top companies. Seven are from India and five from Russia and Brazil. "Western corporations have brought many branches into these countries who are serious competitors," says Harold Sirkin from the Boston Consulting firm.

This system has become very complicated. The entwined paths of individual elements of products are hardly clear to a consumer of an iPhone, a pullover sweater or a pack of chewing gum. Year after year the production chains become more intricate. Every manufacturing step can be quickly shifted to another place on the globe with better manufacturing conditions. Transportation costs almost nothing. The necessary contracts can be signed by telephone and computer.

Must cut flowers from Africa be promoted in Europe?

Some have a wrong idea of the export giant China. The People's Republic can send enormous quantities of cheap goods all over the world. However 50 percent of the products originated elsewhere in the world as intermediate products, according to an estimate of economists Robert Koopman, Zhi Wang and Shang-Jin Wie of the National Bureau of Economic Research in the US. The share is even 80 percent in the high-tech branch.

Thus if transportation costs now regularly rise, if protectionist-minded politicians raise the tariffs and cancel export-promoting subsidies in many countries and if the currencies in many threshold countries are upgraded, these costs could necessitate longer production chains.

In China for example, inflation has climbed to nearly ten percent. Some government experts and central bankers argue the economy of the country is overheated and will bend. In the conference rooms of the Chinese authorities, there is passionate argument whether the currency should be upgraded in the battle against price inflation. Then products manufactured in China for export would be more expensive and relocation to China would be less profitable. The cost advantage is already shriveling because wages are rapidly increasing in wide parts of the land. Adidas has annou9nced it will manufacture fewer casual shoes in the kingdom of the middle on account of higher wages.

Some economists and politicians in the West would even be very thankful for that de-acceleration. Donald Kahn, the vice-president of the US Federal Reserve, urges fast-growing threshold countries "to limit inflation by curbing the total economic demand." In other words, globalize slower! This is certainly easier said than done in a land like China. No one knows how the success-hungry population will react when the growth of ten percent and more is cut in half.

De-acceleration cannot happen overnight. Hardly anyone expects that the globalization of the last two-and-a-half decades will actually be revoked. While collapse is possible, de-acceleration is more likely. With de-acceleration, globalization will catapult fewer jobs around the globe. In addition, the oil costs and climate treaties will force the world economy to include the costs of environmental crimes more strongly in their profit calculation. This could be a gentler globalization 2.0 instead of de-globalization.

Great pessimism, says Rolf Langhammer from the Institute for World Economy in Kiel, is "simply nonsense." The vast majority of the international division of labor has such experienced such positive advantages that times of exploding raw material prices, unfavorable exchange rates and bad-tempered trade representatives cannot last. Several reckless business models must be reconsidered. How long will it be sensible to manufacture steel in China and then transport the steel on huge freight ships to the US or Europe? Or send cut flowers from plantations in remote Africa or Latin America by plane to Europe? "The effects of higher transportation costs could be very great," the economist Paul Krugman says.

In the summer of 2008, the US supermarket giant Wal-Mart began a national campaign emphasizing "regional food." Instead of purchasing food centrally, the buyers of the corporation want to sign contracts with farmers in the respective states. One firm spokesperson estimates the company could save 190,000 gallons of diesel per year. "Location Germany is attractive again," the Frauenhafer Institute for System- and Innovation Research in Karlsruhe boasted. Fewer German businesses shift their production abroad. "Every fourth or sixth enterprise returns since losses in quality and flexibility devour the hoped-for savings from wage costs. For years, the management of whole computer systems from distant India was the great innovation with banks and airlines even in Germany. Some shifts only succeeded on paper. In practice, an avalanche of practical harmonization problems resulted, including the hectic to-and-fro travels of project employees.

This does not mean moving cheap gym shoe-, television- or toy manufacturing into Germany. A normal pair of sports shoes would cost 500 euro if produced in Germany, Adidas says. Shifting production from the Far East to the still cheap Eastern Europe is seriously considered.

Boston Consulting calls this "near-shoring" - production near the home country where it is still reasonably inexpensive. In the textile branch, according to this consulting firm, the "low costs in Asia and speedy delivery from Eastern Europe are painfully weighed." When British prime minister Gordon Brown at a recent meeting of Mediterranean states envisioned an "economy after oil," he did not think of the local economy. No, not at all! Giant wind farms in North African deserts that could deliver environment-friendly energy for Europe were discussed at the meeting. Globalization for the environment is also a possibility.

The big shipping companies are slowing down the speed of their freighters... "A reduction from 25 to 20 knots in a fast container ship can save half the fuel," says Max Johns of the Deutscher Reeder association. Globalization will be slower.

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