6 Critical Themes for the New Global Economy
Covid-19, global supply-chain disruptions, frictions in reopening economies worldwide, and now Russia’s invasion of Ukraine are spawning many winners and losers in economies, financial markets and political structures.
Six of them are driven by transfers of incomes and assets. Five more are fundamentally the result of repricing goods and assets that I’ll cover in a separate column. Changes sired by either of these forces have further significant consequences.
I define globalization as the use of Western technology to produce goods in cheaper production sites that are then exported to rich countries in North America and Europe. In modern times, production using low-cost but disciplined labor started in China in the late 1970s and then spread to other Asian lands such as Vietnam.
Globalization decimated high-paying manufacturing jobs, which plunged from 19.6 million in the U.S. in 1979 to 12.6 million last month. That spawned political movements on the far right and extreme left with significant results, including Donald Trump’s election victory in 2016.
With the exodus of manufacturing jobs went private sector unionization, which collapsed from 24% of payrolls in 1973 to 6.1% more recently.
1. Globalization encouraged extensive but complicated international supply chains designed to minimize costs.
Semiconductors can be produced in Taiwan, then sent to Malaysia for further assembly and on to China for final production of consumer goods that are exported to the West. The pandemic and Russia’s invasion of Ukraine have disrupted these supply chains.
They won’t disappear as long as there are significant differences in production costs in various countries but are being shortened and shifting to closer countries such as Mexico. The domestic response is more labor-saving automation.
Winners include Mexico, hardware and software automation and employment, and losers are manufacturing jobs and labor unions in the West.
2. The war in Ukraine amplified the jump in fossil fuel prices that was already underway as a result of the pandemic and the reluctance of OPEC-plus to raise crude oil output substantially.
Also, President Joe Biden pledged to eliminate fossil fuels before alternative renewable energy sources can replace them. The U.S. is a net exporter of energy except for safe sources from Canada and Mexico, but with Russia supplying 40% of European natural gas and war-related sanctions, replacement demand from the U.S. and other sources like Qatar has leaped.
The jump in gasoline prices is so noticeable by consumers that Biden has been forced to release oil from the Strategic Petroleum Reserve. He’ll probably also need to aid American frackers, and while major oil companies are emphasizing their green credentials, smaller producers are stepping into the breach.
Also, oil refiners may do well as their margins — the difference between the cost of crude and the selling prices of refined products—rise. In addition, they may pick up some of the government cuts in gasoline taxes.
The jump in fossil fuel prices has renewed interest in uranium production and nuclear reactors. Prices of uranium oxide and uranium miner stocks have leaped as Washington considers a bar on uranium imports from Russia.
Belgium recently postponed its nuclear energy phase-out by 10 years. France announced plans in February to construct six new reactors, and British Prime Minister Boris Johnson is pushing his country’s nuclear plans.
Other winners include OPEC and producers and transporters of liquefied natural gas, but Asian consumers lose as LNG is diverted to Europe. High energy prices rob consumers of purchasing power.
Wind, solar and other renewable energy equipment-makers and producers may be eclipsed at least temporarily in favor of quicker availability of fossil fuels, including coal.
3. Inflation is a time-honored method of transferring purchasing power and assets.
The recent widespread rise leap in prices due to the pandemic, supply-chain disruptions, frictions in reopening the economy and the war in Ukraine is no doubt temporary.
Asian economies are big producers but small consumers, with consumer spending in China accounting for 38% of GDP, compared with 68% in the U.S. So, their saving glut and the global surplus of supply versus demand is highly deflationary.
Also, American consumers expect a manageable 3.7% annual inflation rate over the next three years, according to New York Federal Reserve surveys, so there’s no evidence of buying ahead of need as in the late 1960s and 1970s.
