Globalization 2.0
In the spring of 2005, New York Times columnist Thomas Friedman wrote a book that claimed to predict the future. It was so popular that it sold over 4 million copies and made Friedman a celebrity. Spanning 660 pages, The World is Flat recounts how in the early 2000’s, some of the world’s largest companies had begun relocating their operations around the globe by offshoring and outsourcing various facets of their business. What made the book so engaging was that it promoted the idea that a globally integrated world, one that was “flat” and frictionless, would lead to greater collaboration. The economic globalization that Friedman espoused was embraced in academia and in Washington as it promoted trade policies with lower tariffs that would encourage a more open “flat” world. With the COVID-19 pandemic and the war in Ukraine disrupting supply chains (causing inflation rates not seen for decades), Friedman’s book has started to lose its luster. Today, businesses are scrambling to fix broken supply chains and are in turn re-inventing what the future of globalization will look like, while Friedman’s book serves as a reminder of what can go wrong when economic idealism meets political realities.
The title The World is Flat was inspired by Columbus’ exploration for a western route to India. While folklore claims that his trip proved that the world was round, that was not the case. Columbus knew that the world was round. He just thought that it was much smaller than it really is and that by sailing west, he would hit India. Instead, Columbus ran into North America, and soon realized that the world was a lot bigger than he had thought! This vastness of the Earth has separated people for millennia, insulating them from external influences. It has also protected companies from outside competition.
However, by the 20th century, technological innovations were making the world a much “smaller” place. With each advancement, the geographical barriers that made the world so big were whittled away. As Freidman would write, what once was impossible was now “simple.” It was as easy for someone in India to do certain jobs as if they were in Indiana.
Freidman saw the loss of U.S. jobs to foreign competition as an inevitable and continual process, as technological changes enable work to gravitate to where it can be done more effectively and efficiently. Just as most of New England’s mills moved to the South in the 19th century, the U.S. saw many companies shift their operations abroad in the 21st century, benefitting consumers and corporations. While the loss of jobs was not downplayed by Freidman, he saw this change as an opportunity to free up people and capital to do more “sophisticated” work. It was an idea embraced by those who supported the North American Free Trade Agreement, and used in defense of future trade deals that led to accepting China into the World Trade Organization.
The beneficiaries of this trade liberalization have been investors and corporations, as companies were able to reduce costs and increase profits by moving their operations overseas. Consumers also reaped the rewards, as inflation was kept at bay and the cost of many household items actually declined, despite significant improvements in quality. In 2002, one of the most popular TV’s sold was the Sony Trinitron WEGA 36” (1040p) that cost $2,700. The 236-pound TV required two people to lift it and was the size of large oven! Today, a wall-hung Sony 55” 4K TV costs $700 and weighs less than 40 pounds. However, it was not just TV’s that were improving in quality and falling in price. Since 2000, everything from clothing and household furnishings, to computers and toys all saw reductions in price, giving consumers greater purchasing power, while at the same time causing the U.S. trade deficit to grow.
We have often speculated that the decades of low inflation in the U.S. were correlated to the rise in imports and the efforts by China to keep its currency low. The lack of inflation kept interest rates near historic lows, making borrowing attractive for individuals and corporations alike.
However, this flattening of the world was not good for everyone. Many American workers did not fare so well. From 2000–2014, the Real Median Household Income decreased from $63,292 to $58,724. (By 2020, the number had only grown to $67,521). Decades of low interest rates also meant that those who once relied on safer investments such as savings accounts and certificates of deposits either had to move their money into riskier investments, or accept a significantly lower rate of return.
From the mid-nineties to 2016, the idea of trade liberalization was embraced by both parties in the U.S. Not only did it benefit consumers and businesses, but according to Friedman, it also promoted peace. In an earlier book, The Lexus and the Olive Tree, Freidman expounded on this idea, calling it the “golden straight jacket,” where economics matter more and politics less as nations would be tied together economically.
As each administration embraced greater trade deals that lowered tariffs for U.S. made and foreign supplied goods and services, companies rushed to outsource jobs. Yet, unemployment remained low, and despite stagnating wages and a growing trade deficit, few complained. However, the stage was being set, both economically and politically. It was not until 2016 that the national view on globalization began to shift. President Trump’s oft-used line, “Nothing is made here anymore” resonated, because of the “flattening” that Freidman predicted. In the 1950’s, the United States was the manufacturing powerhouse of the world. By 2019, over 90% of all umbrellas, video games, cooking appliances, baby strollers and more were manufactured in China. Europe’s dependence on Russian oil would have made Churchill’s blood boil, yet, in Friedman’s flat world, such interdependence was viewed favorably. In fact, he would have seen Russia as the weaker party.
As Friedman saw it, “The ideal country in a flat world is the one with no natural resources, because countries with no natural resources tend to dig inside themselves. They try to tap the energy, entrepreneurship, creativity, and intelligence of their own people-men and women-rather than drill an oil well.” With Russia’s invasion of Ukraine, Western Europe boycotting Russian oil, and Ukrainian grain shipments cut off as a result of the war, many parts of the world are facing economic hardship due to the mere fact that they lack the natural resources that Freidman discounted. The idea that the world is flat now appears to have cracks.
The biggest challenge to Freidman’s flat world theory came with the COVID pandemic, which demonstrated all that can go wrong when nations no longer produce the items that they need, and are dependent on just one or two suppliers who may be continents away.
The supply chain disruptions that occurred during the pandemic caused companies to realize that Friedman’s integrated world has its pitfalls. Before the pandemic, all iPads were made in China, but when China placed cities under quarantine, Apple was in a bind to fulfill orders. This caused Apple to diversify the manufacturing of some iPads to Vietnam in order to make the company less dependent on any single source or nation. Apple is not alone, as most companies are reassessing their sources for raw materials, parts and manufactured goods, and are shifting to other parts of Asia to make their companies less dependent on China as a single source provider. This will increase costs in the short run, but should help to address the current supply chain problems that persist today.
For investors, the pandemic and the war in Ukraine created unforeseen obstacles, amplified by the very interdependence that Friedman championed. The disruptions in supply chains led to shortages and inflation rates not seen for decades. Investors are anxiously awaiting how higher costs will affect corporate earnings in the second half of this year.
It is of little surprise that governments are revisiting the idea of whether increased economic integration can promote peace and if it is wise for one nation to be so dependent on another as Freidman encouraged. As The Economist recently opined, “Increased economic integration did not bring about the greater global harmony that some had hoped it would.” This realization has forced nations to rethink what a globally interconnected world should look like. It is a story as old as Columbus’ fabled trip, and a reminder that the world is indeed round, and as unpredictable as ever.
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