Most people think the biggest threat to globalization is mounting economic nationalism and trade protectionism. That may well be true. But in a thoughtful and provocative article in the Harvard Business Review, George Stalk argues that globalization faces another threat – a looming infrastructure crisis that is creating huge bottlenecks in the flow of global products and services.
As supply and distribution chains have become longer and more complex, companies have begun to realize that increased logistics costs can reduce or even eliminate the benefits of manufacturing where labor is cheap. The congestion and bottlenecks of a transportation system strained beyond capacity compound the problem, making supply chains seem even longer and more unpredictable.
There’s a lot of talk about improving transport times for people, but at this time of rapidly falling imports and exports, there’s not much talk of increasing capacity for goods. High fuel prices are not the only issue here. It’s also the other costs of congestion: higher cost of inventory for goods that are locked up longer in transit; the costs of uncertain, more variable transport times; and the inability to react to changes in consumer demand.
Stalk argues that while the crisis provides a temporary reprieve, the stimulus is not addressing this looming longer-run economic threat.
If pre-recession trends reappear when the economy recovers, lack of infrastructure capacity, in combination with rising oil prices, will constrain global trade and drive up costs. The U.S. stimulus package, with its focus on “shovel-ready” projects that quickly create jobs, will produce newly painted bridges and newly paved roads but is unlikely to address the capacity problem.
July 9th, 2009 at 1:54 pm
Long term that makes a lot of sense, but isn’t there also significant marginal cost pressure short term that makes globalization challenging in this environment?
A lot of the cost of globalization is variable. You can take ships off line, take planes out of service etc. But a lot of the costs are still fixed. Companies, employees, etc.
If there are 100 units shipping globally, the fixed costs are spread across all 100 units. However, if trade decreases and only 73 units are shipped, the amount of fixed costs which must be borne by each unit increases. So the less trade there is, the more expensive each trade becomes.
As unemployment increases in the US the cost of hiring in the US goes down. At some point, it becomes more economically beneficial to manufacture in the US than it is to manufacture internationally.
Whether you call it protectionism, patriotism (hiring my fellow Americans) or risk mitigation (can you say lead paint), at some point it becomes a purely economic decision where to manufacture.
July 9th, 2009 at 4:04 pm
Without expanded infrastructure in the US, it won’t help to manufacture more goods there. In fact, that would likely just increase the problem. Right now, getting all the component parts for the manufacturing of goods to the factory is China’s problem. America only needs to receive the finished product by ship, rail and truck.