Outside The Box
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As freight transportation became more reliable and less burdensome while tariffs on imports faded away, differences in production costs came to dominate companies’ decisions about where to make their goods. Two factors in particular loomed large by the final years of the twentieth century. One was wages: the gap between the pay of factory workers in China, Mexico, or Turkey and those in Europe, Japan, or North America yawned so wide that even if the low-wage workers accomplished far less in an hour of work, producing abroad rather than at home made financial sense. The other draw was economies of scale. Where an automaker’s parts division would likely make headlights only for the parent company’s cars, a headlight specialist could sell to many automakers, producing at enormous volume and, by spreading its administrative and engineering costs more widely, lowering the cost of making each unit.
As Japanese electronics companies sent assembly work to Malaysia and European clothing chains ordered more apparel from Bangladesh, massive amounts of foreign investment built new manufacturing facilities abroad, and the total amount of foreign trade increased. But there was a finite number of rich-country factories whose work could profitably be relocated. Once the great exodus of manufacturing from high-wage countries petered out, production shifting no longer provided a boost to trade.
At the same time, many manufacturers and retailers concluded that complicated long-distance supply chains were less profitable than they had imagined. As freight transportation became slower and less reliable, and as more sole-source factories experienced unplanned outages, executives and their shareholders became more attuned to the vulnerabilities created by corporate strategies. Minimizing production costs was no longer the sole priority; making sure the goods were available when needed ranked just as highly.
Lowering the risk of business interruptions is neither cheap nor simple. Increasing inventories ties up money in merchandise that grows stale; to unload last year’s fashions, department stores have to mark the clothes down, and last year’s cars lose value sitting on the dealer’s lot. Producing critical components at multiple locations rather than in one big factory creates flexibility, but consumes precious investment dollars and may raise the cost of making each item, placing the manufacturer at a competitive disadvantage when no crisis is at hand.
Globalization has transformed itself repeatedly over two centuries in response to technological change, demographic pressure, entrepreneurial ambition, and governmental action: someone speaking of globalization in 2020 was discussing an altogether different subject from globalization in 1980, much less in 1890. It treats the Third Globalization, the quarter-century or so between the late 1980s and the early 2010s, as a distinct stage in the world’s economic history, a stage unlike what came before and what is likely to come after. It emphasizes the roles of transportation, communications, and information technology in enabling firms to organize their businesses around long-distance value chains, a fundamentally different type of economic relationship from any that existed before.
In the “South,” the “periphery,” the “less developed” economies, the average person consumed significantly fewer manufactured goods than the average person in Europe or North America, and domestic factories produced little aside from clothing. Poorer countries were unable to move up the economic ladder, processing their cotton into fabric and their ore into iron bars, because of the high cost of shipping their goods and because the wealthier countries raised barriers to their industrial exports. Few jobs offered more than a subsistence wage. One statistic graphically captures the divide: In 1959, Latin America, Africa, and Asia, added together, were responsible for less than 10 percent of the world’s manufacturing output.
Living standards, after falling steeply in the early years of industrialization as automation drove down wages and fetid slums burgeoned, began to improve as cities belatedly built water and sewer systems and funded primary schools to teach all children reading and arithmetic. Innovations in transportation and communications reduced the isolation of rural villages and allowed easier domestic trade.
One of the aftereffects of hot money would be longer lasting. The economic crises in the less developed countries depressed their currencies relative to those of wealthier economies, especially the United States. These favorable exchange rates helped the LDCs run trade surpluses by making their exports more attractive abroad and their imports dearer. Trade surpluses, the International Monetary Fund counseled, would enable the LDCs to amass foreign currency to pay their bankers. “US imports from Asia and European developing countries increased by some 80 percent between 1980 and 1984,” the IMF reported proudly in 1985, adding that “exporters of manufactures achieved remarkable success.” US workers felt the consequences. The US trade deficit with developing countries in East Asia increased from $4 billion in 1980 to $30 billion in 1986. Apparel plants, shoe factories, and steel mills laid off workers by the tens of thousands.