25 August 2011

Globalization Schmobalization

A new analysis from the Federal Reserve Bank of San Francisco comes to the counter-intuitive conclusion that,
Although globalization is widely recognized these days, the U.S. economy actually remains relatively closed.
Here is part of what they find:
Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the U.S. workers and managers who staff these operations.

Table 1 shows that, of the 11.5% of U.S. consumer spending that goes for goods and services produced abroad, 7.3% reflects the cost of imports. The remaining 4.2% goes for U.S. transportation, wholesale, and retail activities. Thus, 36% of the price U.S. consumers pay for imported goods actually goes to U.S. companies and workers.

This U.S. fraction is much higher for imports from China. Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.
This analysis supports the thesis of Pankaj Ghemawat that the world really isn't so "flat."  He summarizes this thesis in his challenging recent book World 3.0 which I read over the summer.  Ghemawat wrote in 2007:
I still remember a TV interview a year ago in Mumbai where the first question I was asked—quite seriously or, should I say, flatly?—was why I still thought the world was round. Spouting such attitudes—the flattening of the world, the death of distance and the disappearance of differences across countries—seems to be considered a hallmark of global thinking. But I prefer to think of it as “globaloney.”

Why? Because most types of economic activity that could be carried out within or across national borders are actually still concentrated domestically. Not convinced? Ask yourself, of all the capital being invested around the world, how much is foreign direct investment by companies outside of their home countries? Maybe you’ve heard the globaloney about “investment knowing no boundaries,” and so on. The fact is, the ratio is generally less than 10% and, while it may be pushed higher by merger waves, has never reached 20%.

As the chart below demonstrates, the actual levels of globalization associated with telephone calls, long-term migration, university enrollment, stock investment, and trade as a fraction of gross domestic product (GDP)—look at the blue bars—resemble the data presented above: they fall much closer to 10% than the levels close to 100% that one would expect if one took the gurus of globaloney at their word.

The implications here are the we should be supporting globalization -- the interconnections of markets and societies -- not pulling away.  The fact that reducing reliance on Chinese imports costs American workers more than Chinese workers is one of those inconvenient facts that will find it difficult to make it into American political discourse.

As The Economist notes of Ghemawat's analysis versus that of Thomas Friedman or Benjamin Barber:
This sober view of globalisation deserves a wide audience. But whether it will get it is another matter. This is partly because “World 3.0” is a much less exciting title than “The World is Flat” or “Jihad vs. McWorld”. And it is partly because people seem to have a natural tendency to overestimate the distance-destroying quality of technology.
The world isn't much globalized and globalization is a good thing.  Try making those arguments these days.

17 comments:

Menth said...

Extremely interesting article, thanks Roger!

Roddy said...

"The world isn't much globalized and globalization is a good thing. Try making those arguments these days."

The first is, and always has been, a matter of fact, as shown in Ghemawat's stats.

The second is Economics 1.01 - trade is good, right?

Mark B. said...

As always in such analyses, it was not written by someone who would work in a sneaker factory. The underlying assumption is that jobs don't matter - only costs matter. When economic analysis starts getting outsourced to India, the entire field will turn on a dime.

If someone was gradually amputating parts of your body, would you say, "it's alright, that's only one small part of me - and after all, I'm losing weight?"

Traditionally, recessions ended when factories started re-hiring laid off workers. Those factories are in China now. Do you really think it won't affect you just because you never worked in a factory? We've created a permanently under/unemployed underclass who have no hope of a job with good wages.

Baron said...

Big problem looming. In Australia more and more goods are being ordered over the internet direct from China through Ebay and other sources.All the local people are being cut out other than the postal service. The end of this is nowhere in sight and while it is good for consumers local retail jobs are being destroyed.

Roddy said...

Yes, I see what you mean Roger. I didn't expect the fans of Autarky Athletic to appear so briskly.

Stan said...

Percentages of cost seem like a really strange way to measure the extent of global trade. Too many oranges getting counted with the apples.

Of course, from a policy standpoint, the important issue is freedom to do so, not the extent. The impact of the benefits flow from the freedom, not the actual fact of global trade.

Khan said...

I disagree that the paper in question has any value.

Even a cursory glance at its contents show a distinct lack of intellectual rigor.

For example:

Gasoline/Fuel Oil/Energy Goods - 88.4% 'Made in USA'?

Bulls**t. I can see how this conclusion was drawn; the oil was imported but the refinery 'made it in the USA', but to say this is category is overwhelmingly US does not bear up to even a cursory examination.

Next category of crap:

Motor vehicles: 74.9% 'Made in USA'
Ford + GM + Chrysler car sales market share in 2010: 44%

Yes, there are many factories in the US assembling cars for foreign companies. But these cars aren't made with US parts.

74.9% is clearly far too large except under the most politicized definition of 'Made in USA'.

Third category of crap:

Housing: every category is 100%. This is equally patently false. From the labor of assembly to the materials used - I find it extremely unlikely that foreign representation is 0%. Chinese Drywall lawsuits if anything else indicate the unreliability of figures in this category.

Then there's outsourcing to India for call center and IT support, H1B labor in the US, offshore Multinationals and their transfer pricing, etc etc.

I can believe that the percentage of US goods made in America by Americans is not as bad as our trade deficit would lead us to believe, but to say that nearly 82% of all goods and services fall into this category is to beggar belief.

DeWitt said...

Khan,
"Yes, there are many factories in the US assembling cars for foreign companies. But these cars aren't made with US parts."

Not true.

"On the other hand, Toyota's Camry is comprised 80 percent of parts made in the United States, and 56 percent of Toyota's vehicles sold in the U.S. also are made here, according to Toyota spokeswoman Sona Iliffe-Moon.

The Toyota Sienna and Tundra also have 80 percent of their parts manufactured in the U.S.

"When you have manufacturers from around the world building cars in the U.S. with 85 percent domestic content -- engine, transmission, assembly -- is that an American car?" Mandel asked. Or, he asks, is it considered foreign because the profits go back to a foreign country?"
http://articles.cnn.com/2008-12-12/us/american.cars_1_foreign-brands-dutch-mandel-american-car?_s=PM:US

Khan said...

Toyota may 'officially' make a large portion of its "American-Made" car parts in America, though I'd personally want to look a lot closer into that.

But then you'd have to acknowledge the percentage of foreign parts in American cars:

http://blogs.cars.com/kickingtires/2009/07/domestic-parts-content-and-automakers.html

GM: 69%
Ford Motor Co.: 64%
Chrysler Corp.: 60%
Honda/Acura: 58%
Toyota/Lexus/Scion: 44%
Nissan/Infiniti: 31%
Mitsubishi: 25%
Subaru: 20%
Mercedes-Benz: 16%
Suzuki: 12%
Mazda: 11%
Volkswagen/Audi: 9%
BMW/Mini: 5%
Jaguar/Land Rover: 3%
Porsche: 3%

NHTSA's data from 2005 shows a clear deterioration across the board (with the only possible exception being Toyota) in terms of domestic content.

If the domestic content of the leading US manufacturer in 2009 is only 69%, how exactly can 78.4% of all cars be "Made in USA"?

Still want to argue with me?

DeWitt said...

Khan,

You made a statement that was absolute about foreign cars being assembled in the US not using parts manufactured in the US. You were wrong. You then proceeded to move the goalposts. The link I posted was about exactly where you moved the goalposts, i.e. what actually constitutes a US made car. That is indeed an interesting point, but not the one you made originally. I would also say that 74.9% (not 78.4%) is not "clearly far too large" compared to 69%.

Mark said...

In Australia more and more goods are being ordered over the internet direct from China through Ebay and other sources.

Someone hasn't caught on that the numbers involved are minimal. And even then the effects are not clearly negative.

Book sales direct by internet are skyrocketing in NZ. But that barely makes any difference, because the books originally bought via stores were imported too. The method of selling has changed, but the goods bought are the same.

Clothing too: internet sales up, but that does no harm to small time NZ manufacturers, because they could never stock the big chains anyway. It does allow foreigners to buy their goods, which was previously more or less impossible.

The only industry being truly affected by internet sales are the brick and mortar shopkeepers.

Khan said...

@10

What I said was: "Yes, there are many factories in the US assembling cars for foreign companies. But these cars aren't made with US parts."

And in fact this is true. While there are some US parts, there are many that are NOT US parts - even among the US factories.

So try as you might, your belief was wrong and the original statement was correct: the Fed paper shows obvious and large flaws.

MIKE MCHENRY said...

It ignores where value is added. Distribution and retail generally add less value then manufacturing. Therefore jobs there pay less than manufacturing. Having said that if you take a trip through a modern US manufacturing facility its devoid of people. You have to go the control room where they are sitting behind PC's. Automation has probably wiped out as many jobs as imports. The unemployment rate for men age 24 to 55 (core working years) without a HS diploma is 25%. There are no jobs for them and they unlikely to come back. Only a new housing boom could save them.BTW A college grad rate is around 5%.

AlaninAZ said...

These numbers should not be surprising. The US trade deficit is about 600 billion and GDP is 14 trillion. Thus the trade deficit is about 4.3% of GDP, and much of that is imported oil. Also, the study only looked at China. A better metric would have been to estimate the number of jobs that have been displaced rather than the dollar value of trade. Net imports of a few % could translate to millions of jobs.

Ashwin said...

I agree with your larger point, but it can be a bit misleading to just look at the percentage of goods that are produced abroad. Some arithmetic shows that this can actually have a big impact.

The US trade deficit in 2010 is about $500 billion (see http://en.wikipedia.org/wiki/Balance_of_trade ) of which about $273 billion was with China (http://www.census.gov/foreign-trade/balance/c5700.html)

If the US had a balanced trade, and this $500 billion were produced in the US and exported to other countries, how many US jobs would that have created?

About 60% of the $500 billion would have been wages and salaries -- i.e., $300, billion

If we assume that wages per person in the US would be $50,000/year (a high estimate), $1 million of wages and salaries will be sufficient to support 20 jobs.

$300 billion i.e., $300,000 million would be enough to support 6,000,000 or 6 million jobs

US Working age population is about 115 million in 2010 ( http://www.bls.gov/fls/flscomparelf/population.htm#table4_1 )

So 6 million is about 5%.

So if US trade were balanced and not running a 500 billion dollar deficit, we will have unemployment at 10% - 5% -- which would be close to full employment -- assuming 5% is the "normal" unemployment rate.

Khan said...

@14

You said: "These numbers should not be surprising. The US trade deficit is about 600 billion and GDP is 14 trillion. Thus the trade deficit is about 4.3% of GDP, and much of that is imported oil."

This is actually misleading, because a very large chunk of the US GDP is financial, real estate, or insurance related.

While this is 'work' in a certain sense, it is definitely not product in a physical sense.

The overperformance of this FIRE sector in the last 2 decades has severely skewed any such 'analysis' of the impact of imports on the US economy; for one thing FIRE jobs tend to be much fewer and also higher paying.

If you want to analyze the impact of various effects on the unemployment rate, look to FIRE first.

Abdul Abulbul Amir said...

.

Traditionally, recessions ended when factories started re-hiring laid off workers. Those factories are in China now. Do you really think it won't affect you just because you never worked in a factory? We've created a permanently under/unemployed underclass who have no hope of a job with good wages.

The US has long had tax and regulatory policies that favor foreign over domestic production for broad categories of goods. Obama is intent on exacerbating this problem in the name of "fairness."

A good example of shooting yourself in the foot is the US refusal to adopt the world standard of territorial income taxation. The net result is to put foreign based multinationals at a competitive advantage to US based multinationals. Over time more and more US corporations will either be acquired or change domicile.

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