The economy is global. That is nothing new. European colonial leaders rarely recognized it in public statements, but for most of the past two centuries their national prosperity was dependent on countries thousands of miles away, dependent on the cheap natural resources provided by their colonial possessions. Much of the European resistance to the anti-colonial independence movements of the 20th century was motivated by the desire to maintain control of the supply chain needed to keep the factories and the tea shops and the construction sites humming. Their form of dependency has changed, and it is now sustained more by diplomacy than by military and bureaucratic control, but it still involves relationships that span the world.
In recent years there have been events that have demonstrated that globalization can have significant drawbacks. In the last half of the first decade of the 21st century the financial sector in the United States, inflated by high risk investments and a housing bubble, collapsed. It was inevitable and predictable, and it should have been isolated, or at least compartmentalized, to the housing market or at least to that and housing-related finance. But it wasn’t, and, in retrospect, couldn’t have been. The financial market in the United States is massive and thoroughly integrated into every segment of the national economy. For example, it was said that after the 1980s General Motors morphed from being a car company into a financial corporation that happened to sell cars. The ubiquity of finance made it impossible to limit the recession damage to one sector. And it wasn’t even limited to one country. The financial markets in most other nations were also inextricably tied in with the investments and securities and strategies of the leading United States firms. Major banks in Europe, Asia, even South America were compromised; if they didn’t collapse entirely they sharply curtailed their lending, and in the process they brought their local economies down with them. The 2008 recession was a worldwide phenomenon.
That recession was one created and defined by distortions in capital markets; cross-border movement of capital is a large part of globalization. But there is another significant global trend that has strengthened in the past five decades. The outsourcing of processes and the resulting transportation of materials—raw materials, parts, and finished products—has increased dramatically. Cell phones are assembled in Korea using components built in five or six other countries. Chickens are sent to China to be butchered and cleaned before being returned to the United States. Exotic woods grown in Brazil are shipped to India to be cut into boards which are sent to Japan to construct houses and furniture. Using such arrangements the manufacturer gains the flexibility to shop around for venues that can provide them with the lowest overall costs, reducing expenditures for labor, land, and regulatory obligations. In comparison, the added costs of long-distance transportation for components and finished products can be relatively insignificant.
Global outsourcing has increasingly been combined with the concept of “just-in-time” delivery (JIT). The JIT method has been promoted in television commercials showing a small retail outlet with empty shelves until the day before it opened, shelves that were almost magically filled by timely deliveries just before the doors opened to customers. JIT has been widely implemented in commerce, allowing manufacturers and retailers to reduce inventories and storage costs, along with waste from excess supplies, by scheduling shipments to anticipate short-term demand. For the most part the process is invisible to consumers, except perhaps for those clothing shoppers who find themselves staring at a rack of dresses sized extra-small and extra-large with nothing in between.
The routine problems arising from the combination of outsourcing and just-in-time are easily predictable. The latter requires that any location that needs specific components or products must accurately predict near-future demand. To respond to that demand, each stage in the supply chain must also know how much time it will take to fulfill an order after it is made, including both the production time for multiple components and the outsourcing-related delays involved in transportation from two or three different sources. This is complex enough, and it is fortunate that we have computers to track such routine factors in international commerce.
The situation today, however, is not routine. The threat of the coronavirus (the COVID-19 strain), as it has escaped China and rapidly, often inexplicably, appeared in countries on every continent, has demonstrated how vulnerable our global market systems are. Wuhan, the massive Chinese city where the virus apparently started, is one of their largest industrial and transport hubs, is known as their “motor city”, and is a major tech center as well. All of that, of course, was shut down as China attempted to control the outbreak. At the beginning of 2020 the import traffic from China was already depressed by the unnecessary and poorly-planned tariff wars of 2019 and by the usual week-long shutdown for Lunar New Year, but it has not recovered to the levels seen prior to 2019. Imports from other countries have also been impacted, and some factories in the United States have shut down operations for lack of necessary components. Demand for some commodities, such as oil, have declined, sharply pushing down prices and industry revenues.
Global trade is not the only casualty. As in China, firms in many countries have temporarily shut down operations to avoid bringing their employees into contact with each other in central facilities. Italy and Spain have imposed severe nation-wide restrictions on travel. In many countries, including th United States, large events—concerts and conventions and competitions—have been cancelled. Consumers have begun suspending unnecessary shopping for the same reasons, often after flurries of hyper-purchases of essentials. The resulting pauses in economic activity will severely depress wages and profits. The travel industry has suffered what have been termed “catastrophic losses” as tourists have cancelled or delayed plans for vacations. The Dow Jones average mirrored the level of business concern about the future effects of the epidemic by declining almost 14 percent in the final ten days of February and by swinging wildly in the weeks following that, shifting into a bear market for the first time since the 2008 recession and almost wiping out all of the growth achieved in the past three years. That’s probably an overreaction, as is common on stock markets these days, but it does underline the seriousness of the problem.
As we watch the commercial markets and our own national government attempt to deal effectively with the COVID-19 pandemic, several things become clear. We have created interconnecting systems that are highly complex and dependent on standardizing assumptions. They provide many benefits, products and either cost savings or profits, that would not be available otherwise, and we manage to keep them running relatively smoothly under normal conditions. But the 2019 tariff wars and the mismanagement of COVID-19 have demonstrated that the system requires knowledgeable national leadership dedicated to global cooperation. The current administration in Washington, D.C. has failed on both counts, making the inevitable difficulties much worse than they would have been.