Unbalanced globalisation- real cause of crisis

I’ve been thinking for quite a while now on whether or not globalisation has been a good thing for the average person in Western countries. It seems to me that it is driving the unemployment rate inevitably upwards due to the loss of export jobs and there are not and will not be enough jobs created to replace them.
I have worked in international trade for many years and I can see the good and the bad parts. A good example is the technical company my friend works for which is increasing revenue worldwide yet reducing staff, operations and pay levels in the UK (it’s HQs and base for 25 years), after being taken over by American multinational. The American multinational is focused on driving cost down by outsourcing to developing countries even though the UK operation has always been the most profitable of the merged operation (20-30% annual profit every year for 25 years). This same phenomenon is happening all over the UK, thereby killing the domestic market, as British companies sell out to US based multinationals they will kill their own market as the scale of the market has no real value to the foreign mother company.

We can see countries that haven’t sold out their domestic companies (German/Swiss/Danish/Finnish/Japan), still have strong economies in general with high wage levels.

This article sums it up nicely.

There’s a type of unholy alliance between corporations and the Chinese government, the corporations get to keep the extra profit-spread in a nice game…

a) off shoring production and jobs to China
b) China keep yuan down and at the same time buys large amounts of USD to fund American consumers
b) the corporations buy/manufacture the products from China in undervalued yuan
c) customers from US and Europe to pay in artificially strong USD/Euros (money that appears strong but is held together by a bluff)

Using this method they reduce costs on operation and labour, while earning extra profits by taking the difference between the strong USD/Euro and low-pegged yuan.

Ultimately this system is not sustainable as it reduces the purchasing power of their original market, reduces tax income from customs tarrifs and bankrupts it through owing huge amounts of debt (as can be seen looming in the US/UK). But the genius of this system is that it creates vast new markets to enter such as China and India which can replace the markets they have helped to destroy. They can ride the wave to constant profits, but average Western workers will lose out.

The winners on the Western side are the corporation shareholders, management level who get profit share and the financiers who take their percentage of revenue and profits.
The winners on the Asian side are the government who get increased revenue and the average worker in Asia.

So globalisation, good thing for the average Asian, ultimately bad thing for low/middle skilled Western worker. I know consumers have got cheaper TVs, clothes and toys but I don’t see the benefits going beyond that at this point. Resource demand is already driving up costs for basic commodities and consumers are not going to get anything cheaper from here on in because labour costs are already rising in China (and what they got wasn’t cheap if you factor in that it destroyed your own long-term earning power and local economy tax base plus pollution and global warming).

I benefit from globalisation as so do many people in Taiwan I suspect and I know the situation is a bit more complicated than I have outlined above. I just think that it is so obvious that Obama’s no.1 policy should be to abandon the current non-tariff agreements (if China refuses to revalue yuan) which are killing America’s long-term stability and prosperity and I can’t understand why they haven’t done that yet.

The final phase of globalisation will end up with workers worldwide getting put out of the picture altogether with automated services/robots, that’s when the fun starts!

Because protectionism causes other countries to retaliate and impose tariffs of their own. Americans would then be forced to consume expensive American products, or (unnecessarily) expensive Chinese ones. The economic literature is brimming with analyses similar to this:

Federal Reserve Bank of New York
Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis

Hopefully, Obama will continue to listen to his advisors.

And, regarding the blue collar worker, this from the Brookings Institute:


[quote]Actually, the integration of China into the international division of labor was only part of the broader process of economic globalization that accelerated in the last decade of the twentieth century. The labor force of the former Soviet Union and India joined the international division of labor on a mass scale at about the same time that China did. Table 3 shows that the number of workers already engaged in the international division of labor was 1.08 billion in 1990, and the combined labor force of the former Soviet bloc. India and China (SIC) was 1.23 billion. The division of labor in 1990 was certainly an unnatural one because half of the world’s workforce had been voluntarily kept out of it by the SIC’s autarkic policies.

A decade after the start of the internationalization, the number of workers involved in the international economic system had increased to 2.672 billion in 2000 (with 1.363 billion workers from SIC). The Heckscher-Ohlin model would predict that this doubling of the world labor, achieved by bringing in cheaper labor from SIC, would lower the relative price of labor-intensive goods and hence reduce the income of labor in the industrialized country. The fact that U.S. capital could now move abroad to set up production facilities in the SIC economies to service the U.S. market and foreign markets meant another channel (besides the cross-border movement of goods) for globalization to depress the U.S. labor income.

There is no denying that the Heckscher-Ohlin model provides a coherent mechanism for globalization to lower U.S. labor income, and to cause U.S. unemployment to rise during the process. The fact that the overall U.S. trade deficit widened steadily from 1.5 percent of GDP in 1991 to 2.5 percent in 1996, 4.4 percent in 2001, and 6.7 percent in 2006 could only have worsened the drop in labor income and the rise in the unemployment rate because U.S. exports are less labor-intensive than U.S. imports.

The inconvenient truth however is that the above two expectations based on the Heckscher-Ohlin model have turned out to be wrong. The alleged rise in U.S. unemployment is not seen when we use the 1998-06 period chosen by Robert Scott (2007) as the reference point. The average unemployment rate of 4.9 percent in the 1998-2006 period was actually lower than the average unemployment rates in the immediate previous periods of 1980-88 and 1989-97, which were 7.5 percent and 6.0 percent respectively. In reality, the U.S. economy has been a highly successful job-creation machine in the 1997-2006 period

So is the backlash against globalization in the G-7 countries the result of the immiseration of their low-skilled workers? The answer is no, because earnings is only one of the two components of compensation received by workers, the other component is employer-paid benefits (e.g. pension contributions, health insurance). The neglect of benefits gives the wrong picture on income received by labor because the growth of benefits has been especially rapid in the last decade due to the soaring costs of health insurance. When we measure labor income as the sum of earnings (wages and salaries) and benefits, then we find that labor income in 1980 is lower than in every year in the 1982-2006 period, refuting the conclusion drawn from looking only at the earnings component of labor income.

Series (a) shows that the earnings of the blue-collar worker in 2006 were 1 percent lower than in 1979. Series (b) shows that the compensation (earnings plus benefits) of the blue-collar worker in 2006 was 12 percent higher than in 1979. In fact, blue-collar compensation had been higher than in 1979 since 1991. Furthermore, blue-collar compensation started growing faster beginning in 1997, just as the U.S. overall trade deficit started growing faster. Series (d) shows that the compensation of the white-collar worker in 2006 was 28 percent higher than in 1979. This much higher income growth of the white-collar worker caused the compensation of the average worker, series ©, in 2006 to be 20 percent higher than in 1979. The important message from Figure 2 is that the income growth of the United States in the 1990-06 period of accelerated globalization was shared by both low-skilled workers and high-skilled workers, albeit the latter received a larger share of the income growth.[/quote]

I think they are lying.

You see I’ve read and seen some of these analyses before, but my contention is that globalisation is unbalanced, not that it is harmful per se. It’s leading to massive trade deficits in industrialized countries and ultimately a lowering of standard of living for blue collar and perhaps even middle class workers. It’s a trend that is blindingly obvious and has been a long-time in the making…industrialised countries losing their manufacturing base and blue collar jobs and now also spreading into service sectors such as IT and even education sector as government loses taxable income and bankrupts due to trade deficit. To be fair there have been a few winners, those industrialised countries such as Australia/Russia which supply commodities and resources to fast growing developing countries such as China.

The situation needs to be rebalanced, either by revaluing the yuan (which is not happening) or else by introducing tarriffs against countries such as China to force that to happen. That doesn’t mean tarriffs have to be 30-50%, start at 10% and see what happens. The Chinese have committed to only a 4% increase in the Yuan compared to the dollar in the next couple of years…crazy situation.

Tarriffs will not be as harmful as proposed because they simply rebalance against the undervalued Asian currencies AND they generate tax income for the govt. The current situation has been gerrymandered so that although seemingly equal with no tarriffs (not equal anyway because of low cost base of Asia), Western countries have a disadvantage to enter emerging markets such as China. When companies want to invest in China they have to setup joint operations, source local parts and teach (yes teach) local factories how to make and construct their products. The Chinese then do it cheaper and take over the local market- high speed trains, cars, nuclear power, pharmaceuticals, computers…the list goes on. I think the original arguments for the WTO didn’t understand how quickly the Chinese would build their own capabilities and how rigidly they would control their own market

I don’t like reading arguments from think-tanks (another problem with American political debate). Maybe you can do some analysis yourself?

I could, but it would most likely be gibberish. I prefer to read economists, in general, as I simply don’t have the time or expertise to generate anything worthwhile myself. I guess the flob is not the best place to be posting academic literature.

I’ll be off now.

Anybody can google and post stuff…it’s not very thoughtful though is it.

Hmm isn’t the theory that as we progress beyond manufacturing we move to service work which is higher paid?

I just don’t think your arguments stack up - one of the real problems is the unions -particularly in the US where they are still so dominant and push wages up to unrealistic levels even for menial jobs. In the UK this is less of an issue as Thatcher took on the unions and weakened them considerably but we have a Labour government spending money they haven’t got on shite that isn’t needed -hey presto instant defecit. Its got nothing to do with the Chinese.

Of course the old model where you ,marched in and took over the country you wanted to import from was much more robust but we aren’t allowed to do that anymore - you have to be called Bush to pull that one of without retribution.

Emm…again you haven’t looked at my ‘unbalanced’ gloablisation part. Globalisation is good but it’s swung against the benefit of large sections of Western society in it’s present form. Hence the need for China to be forced to revalue the yuan to even start to make it a truly level playing field (this still doesn’t take into account costs of environmental regulations or healthcare benefits etc).

I know the theory very well about manufacturing moving to service, but that’s just a theory. Manufacturing work brings in a lot of labour, foreign income AND ancillary service industries. It trickles down by a factor compared to service. Even google, a huge leviathan in the online services industry, only employs 20,000 people worldwide. Honhai,an OEM manufacturing giant from Taiwan employs 500,000 people worldwide DIRECTLY (mostly low-paid but not all). I’m not British but to me it’s obvious the main reason the UK is in severe economic trouble is that it’s industrial base has been pretty much wiped out, not enough breadth in the economy now. Manufacturing requires construction, resource provision and servicing companies, creating a much larger and wider demand in the general economy than service industry such as call center, hedge fund trader or real estate agent.

You need both sectors (manufacturing/services) unless you have large resources to be in good economic shape and provide income for low/middle class workers. Strong western countries tend to have that balance or else specialise in added value trading e.g. Holland, Denmark, Germany, Switzerland.

You claim it’s got nothing to do with the Chinese, well it certainly has a lot got to do with them as they have lowered the cost of production to below what the UK can sustain for the products that UK produced, therefore manufacturing base has shut up shop. As with people buying stuff they don’t need, that is also a large part of the problem.

The claim about the unions in the US is true but only for certain sectors such as automobiles. It is now a non-issue as the Chinese are quickly making cars up to quality of US product which will then wipe out even non-union companies.

This article in particular deserves a read. In it the author describes the mistaken belief that Asia will only take low-end jobs and high end jobs and industry will mostly stay in the US. The example of Boeing outsourcing 70% of it’s components including its engines from outside the US is a good one. It also reminds of the order that they got from China recently, with the condition that the vast majority of the plane fuselage will be manufactured in China!

Boieng in China
The article describes the way the CEO seems to be ‘hooked’ on moving more of the design and manufacturing to China. Actually it’s probably part of the deal he signed with the Chinese government but it is not expedient to admit to this.

UK can benefit from financial services, tourism and education, but it can’t make up the hole left in the economy in areas outside London.

[quote=“Thelonlieste”] The average unemployment rate of 4.9 percent in the 1998-2006 period was actually lower than the average unemployment rates in the immediate previous periods of 1980-88 and 1989-97, which were 7.5 percent and 6.0 percent respectively. In reality, the U.S. economy has been a highly successful job-creation machine in the 1997-2006 period

How about the authors choose 1980-1990, 1991-2000, 2000-2010 as their time period for evaluation.

Surprise, surprise, when I checked who wrote the article (which you probably didn’t), it was co-written by an author in the ‘Central University of Finance and Economics’ in Beijing! What else would they write!

This above line in bold is very poorly reasoned, why? Because it deliberately chooses a period of time during which two booms occurred…the dot.com, a very brief downturn and then another boom with cheap credit. These two ‘fake’ booms masked offshoring of jobs, staved off closures of auto plants and employed large numbers of low skilled and un-skilled workers in construction.
It omits the last couple of years when those temporarily employed in construction are again unemployed, the final demise of the auto industry following its credit fueled SUV mad splurge and the laying off of large numbers of government employees and service workers in the US. Now the US has over 10% unemployment and expected to stay that way for foreseeable future, allied with lower salaries, job insecurity and poor benefits.

I found this statement in here, pg.13, a cracker…
‘What is fueling the resentment toward imports from China when the average U.S. worker is
experiencing neither more unemployment nor lower compensation?’

The other thing these reports don’t tell us is the structural changes going on plus systems can go on until one day they break (i.e. bankruptcy of state), things are changing more rapidly now, the tree is shaking and the apples are fallling down one by one.

Lion lieste, you shouldn’t post so-called academic treatises that you haven’t read properly, that you don’t understand where it is from and who wrote it and finally that is full of statements that are patently wrong.

Yeah, I figured they were lying.

headhoncho: Okay, so Americans support American instead. Aside from that quite possibly leading to very lazy domestic industry and little innovation, not to mention China (and others) retaliating, it still doesn’t necessarily actually increase their living standards, and quite possibly sends them backwards as everything suddenly costs three times as much as it would if imported from China and isn’t half as good as something manufactured elsewhere. Everyone has jobs making lots of money, but everything also costs an arm and a leg, so we’re back to square one with all of this.

For the longest time, countries such as the U.K. and the U.S. have been napping under the assumption that they’d be competing with other people earning about the same amount under the same conditions, or thereabouts. In particular, it would have been next to impossible for Americans (and to a lesser extent, other Western nations) not to experience a meteoric rise in power and standard of living in the second half of the 20th Century. Most of the world was relatively arsebackwards and didn’t seem to be showing any signs of catching up, and Europe had just had a good go at pulling itself apart. To succeed under those circumstances hardly seems like a great feat, yet we in the West have embraced it as our entitlement to live in the lap of luxury while much of the rest of the world lives/lived in squalour. Understandably, the rest of the world doesn’t like that arrangement and is trying to change it.

Now everyone is suddenly shocked that instead of under one billion Westerners competing amongst themselves, with America getting the lion’s share of everything, with the addition of the so-called BRIC nations and various smaller countries to the world stage, there are now three or more times as many people in the competition (it was bound to happen eventually, and imagine what will happen when other regions of the world, such as Africa, the Middle East and the rest of Latin America start to get it together). Of course things are going to get tougher. The lifestyles of Westerners far out-strip their actual productivity and the lifestyles of people in other parts of the world are far below their productivity. Everything tends towards an equalibrium, which for people in the West, is downwards, barring great technological innovation. There’s no other way to go.

Isn’t this what America and the rest of the West wanted though? Didn’t we want to see old, backward political ideologies and economic models done away with? Now that everyone’s becoming a rampant capitalist and quite a few countries have also gone democratic, that much more of the world has embraced America the Idea (just at home, and not in America), everyone’s in a flap about having to carve the pie up more ways (even if it is growing, just not fast enough). What do people really want? Did they want to win the Cold War or not?

I personally don’t see any way out of it other than to keep yourself ahead of the game. Of course, that’s much, much easier in a country with a very small population because maybe there are enough high end jobs. Not so for the big countries. I can’t actually understand why Germany manages so well with its immense population. They must be really good at what they do, but surely even that must be getting eroded, or will soon. With over 300 million people, can anyone seriously imagine the U.S. could involve enough of its populace in high end jobs to carry everyone else, even assuming it got everything right (such as higher educational standards and a general improvement in work ethic amongst students and the broader populace – I mean really, does it come as any surprise that Taiwanese kids go to the West and eat Western kids alive in high school when the average Western teenager is a complete good for nothing?) to allow people to grab such jobs? Doesn’t it stand to reason that as China, India or Brazil start to look more like the U.S. that the U.S. will start to look more like China, India or Brazil?

Even if the U.S. were somehow able to tackle China in the ways you think it should and square things up a little, that won’t solve the problems with American manufacturing being uncompetitive. If not China, then Vietnam, Indonesia or dozens of other countries that will gladly erode American market share. In fact in turn, China will be replaced by Vietnam which will be replaced by Bangladesh which will be replaced by Tanzania and so on. Actually, I think national borders won’t matter so much. Sure, governments might set certain regulations, but both people and capital will move much more freely across borders so it won’t really matter because unless people, communities or nations wish to become hermits, they’ll be swept along by the current and just have to compete as best they can.

Basic problem: number of people coming to sit at the dinner table is out-pacing the growth of the pie, and Dad’s getting upset that he doesn’t get seconds tonight.

Making matters even more interesting, the pie might actually have stopped growing for good.

The West entered the WTO because the politicians had been bribed by special interest groups representing manufacturers and retailers. It was a plan to maufacture in low wage countries and market in high wage countries. Their intention was to exploit that dynamic to the utmost and that is precisely what they did. Eventually the economy begins to suffer in what were high wage countries because the number of jobs begins to dwindle and the only way to keep consumption up is by borrowing, much of it from the countries that now possess the manufacturing base. The West, America in particular now borrows from China in order to buy from China. China grows and the west shrinks and it doesn’t matter to to the retailers and manufacturers because they just switch to the new market (China) having gutted the economy back home.

Unless a country is resource rich (like in the UAE - did you know that most citizens there don’t actually have to work, they import almost ALL their labour) it needs a manufactring sector or a good many people start doing without JOBS. It’s that simple. The WTO was a rip off from the get go.

I thought that much was common knowledge.

bob: Except people sold themselves out in three ways:

  1. They didn’t improve their own education or skills to stay ahead of the game. Instead, they thought the party would never end and they’d keep getting paid relatively high money for low skilled work. Indeed, they felt it was their entitlement;

  2. They sold their own jobs (or those of others in a similar situation) overseas by buying cheap overseas goods;

  3. They didn’t invest in society in a broader sense, including good governance (and the saying that people get the governments they deserve is true).

People in the West have no one to blame but themselves for their current predicament because they lived only for the moment, with no concern for the future.

[quote=“bob”]The West entered the WTO because the politicians had been bribed by special interest groups representing manufacturers and retailers. It was a plan to maufacture in low wage countries and market in high wage countries. Their intention was to exploit that dynamic to the utmost and that is precisely what they did. Eventually the economy begins to suffer in what were high wage countries because the number of jobs begins to dwindle and the only way to keep consumption up is by borrowing, much of it from the countries that now possess the manufacturing base. The West, America in particular now borrows from China in order to buy from China. China grows and the west shrinks and it doesn’t matter to to the retailers and manufacturers because they just switch to the new market (China) having gutted the economy back home.

Unless a country is resource rich (like in the UAE - did you know that most citizens there don’t actually have to work, they import almost ALL their labour) it needs a manufactring sector or a good many people start doing without JOBS. It’s that simple. The WTO was a rip off from the get go.

I thought that much was common knowledge.[/quote]

Bob, you pretty much summarized my entire argument and very succinctly too. Look who come out the winners.

So Germany had it’s best year for exports EVER, anybody still want to argue manufacturing isn’t important? Hmmm look at the UK and US.

that’s because people are tired of buying Walmart crap, and you just can’t get good shit from China yet. (only a matter of time before their rampant IP theft bears dividends, though).

I imagine that is especially the case when those think-tanks present evidence refuting your claims, such as your claim that globalization has caused higher unemployment in the West. If you’re not willing to accept evidence from the relevant scholarly sources, you’re not interested in a serious discussion.

No system based on greed is sustainable. But greed is an obvious outcome of human beings being animals whose mental smarts (by and large) exceed their ability to keep in check their natural drives and desires. Thus the name of the human game has been for a long time “exploitation” (of “nature” and of other humans - or, more precicely, of everything, since humans are part of nature). For people who are familiar with these things: the bible’s “old testament” and other religious writings from the middle east and Asia as well as the mythologies of European cultures (Greek, Romans, Germans) give us plenty of clues that it has “always” been thus (“always” meaning “at least within the known part of human history”).

This time (in the current “modern” era), however, the whole planet has been drawn into the process of exploitation in an unprecented manner - we see severe environmental changes as the result of overharvesting (forests, water, animals), transformative activities (loss of top soil, desertification), and pollution (the burning of fossil fules, the creation and release of - by now - hundreds of thousands of chemicals, the re-introduction of radioactive material into the biosphere, etc.). I don’t have time today to source all the things i am writing here, but if you are interested, do some looking up on the topics i have just mentioned. Also this one: species extinction in the industrial era has reached a level that rivals the great extinctions in the earth’s history (“everybody” knows one of them: the end of the “age of the saurs” and the beginning of the “age of mammals”, after a meteor hit on/near what is now the Yucatan peninsula abt. 65 million years ago).

Export-import imbalances and currency imbalances are therefore only the tip of the iceberg - they have occurered many times before and were always resolved through collapses of trading systems and societies, both from natural causes and from human driven causes (think “war”). What is looming beyond the issue of an unsustainable economic system is the issue of an unsustainable way of life as a whole: although humans have caused large scale changes to the natural environment in the past, too, the speed and extent of such change has accelerated by orders of magnitude (in plain English: by a factor of 100 or larger) as a result of industrialisation (which has been occurring basically in the most recent period of approximately 200 years), and we not only increasingly recognize the consequences of these changes but increasingly see ourselves at the short end of the stick, that is, negatively affected by them.

This is not a hijack of your thread - what i have mentioned here simply augments your topic and adds energy to the process of inquiry: the issues i have just mentioned are not new to most of us, and i mention them in this context to show you that if you keep probing into the issue of unbalanced globalisation you will naturaly come across them whether you want to or not (but to some this stuff is so scary that they will refuse to engage with it at all, to others it is as fascinating as everything else life has to offer).


Should we also worry about unbalanced nationalization? After all, there are trade deficits between national regions (e.g., states, provinces), and within regions (e.g., cities, counties). Should we prevent Tennessee from offering tax benefits to auto companies willing to relocate from Michigan or Ohio because unemployment will rise in the Midwest? There are always winners and losers in any market, but there is also always an aggregate increase in production and living standards when trade expands across territories.

The only convincing argument I’ve ever seen in favor of economic isolationism is retaliation for another country’s economic isolationism. But that should only be used as an end towards both nations removing whatever trade barriers have been put in place. There are obvious exceptions for national security concerns, but otherwise its in everybody’s best interest to let people buy and sell products across borders.