In defence of globalisation

Ian Stewart is  Deloitte’s Chief Economist in the UK. This is his Monday Briefing,a succinct and eclectic weekly take on economics and finance.

How production went global

Increasing specialisation in production has been a major driver of human welfare in modern times.

The late eighteenth century pioneer of modern economics, Adam Smith, called it the division of labour. Smith argued that splitting production into a series of tasks, each performed by a specialist, whether a worker or a company, would raise productivity and growth.

Henry Ford took Smith’s ideas to their logical conclusion in the early twentieth century, revolutionising car production with production lines in which workers specialised in discrete tasks executed with reliable efficiency.

Specialisation has taken an increasingly global form in the last 50 years. Companies in different countries specialise in different stages of the production process. Modern manufacturers tend to be groups of interdependent firms, often operating in different parts of the world.

“Competing in a Flat World” describes the process two Hong Kong entrepreneurs faced in coordinating the production of running shorts for a US retailer. The yarn was spun in Bangladesh and woven into fabric and dyed in China. The product was stitched together in Pakistan using buttons from China and zips from Japan. More complex products can contain components from dozens of countries and scores of companies.

This sort of specialisation has given consumers cheaper, better goods at lower prices.

In the UK globalisation has contributed to a more than halving of clothing prices in the last 25 years; the price of computer equipment has fallen a staggering 98% over this time.

In the 1970s British consumers were on the receiving end of some famously bad home-grown cars. My father was the unhappy owner of a notorious specimen, the Austin Allegro. On delivery its paint was flaking off in places and its electrics worked unpredictably. With reason owners and the press dubbed the Allegro the “All Aggro”.

By the 1990s the Allegro was a distant memory. Globalisation and foreign capital and ideas had reinvigorated the British car industry giving consumers reliable cars at keen prices.

These days you don’t hear a huge amount of positive news about globalisation. Last week YouGov published a survey on attitudes to globalisation across 19 countries. Support for globalisation was lowest in France, with fewer than 50% of respondents seeing it as a force for good. What amazed me was that Britons and Americans showed similar levels of scepticism about globalisation as the French.

The strongest support for globalisation came from emerging economies including Vietnam, the Philippines and India.

For these economies trade has created opportunity, jobs and rising living standards. In the West it is widely blamed for the inequality, job insecurity and stagnating incomes.

For Donald Trump the culprit is trade liberalisation deals, such as the North America Free Trade Agreement (NAFTA). But such deals do not seem to have been decisive in boosting trade. Tariff levels and barriers have been falling for decades and were at low levels by the 1990s. Even before NAFTA was signed in 1994 40% of Mexican trade already entered the US duty free.

The big driver of globalisation has not been recent liberalisation but other forces – the industrialisation of China and other emerging economies, falling transport costs and new technology.

More fundamentally, job losses have far more to do with shifts in demand, the organisation of work and technology than with globalisation. The Organisation for Economic Cooperation and development estimates that fewer than 5% of job losses in Europe are due to outsourcing to cheaper production centres.

Nonetheless, Mr Trump talked in his campaign of imposing tariffs on imports, scrapping trade deals and bringing manufacturing jobs back to the US. In a world of globalised production such policies are likely to have unintended consequences.

Take Apple’s production of the iPad. Apple has kept the high-value functions including product design, marketing and software development in the US. The labour for assembling an iPad is primarily Chinese.

In a 2011 study, the Personal Computing Industry Centre (PCIC) estimated that, as the assembler, China’s share of an iPad’s total wholesale price was just 1.6%. The main beneficiaries of Apple’s success are not Chinese assemblers but Apple’s predominantly American shareholders and employees. Apple demonstrates that the real value in electronics lies in design, development and marketing, not in low value added assembly.

Even if Apple were to bring its offshore assembly jobs back to the US it is hard to see Americans signing up for the long hours and, by Western standards, low pay, seen in China. If forced to repatriate low value, labour-intensive processes, Apple would doubtless employ machines, not large numbers of well-paid Americans, to do them.

Unwinding globalised supply chains would not create a flood of high paid jobs returning to the West. But it would mean higher prices and less choice for consumers. Anyone for an Allegro?

Markets & News

The FTSE 100 ended the week up 0.2%.

Here’s our take on what we think are the big economic stories of the week:

Global economics and politics

* The UK grew by 0.5% in the third quarter, official figures confirmed, with business investment growing at 0.9% – indicating the resilience of the economy in the immediate aftermath of the Brexit vote.

* Business activity in the euro area grew in November at its fastest pace in nearly a year, on the back of strong manufacturing and services growth in Germany.

* Consumer confidence in the euro area rose by a better-than-expected rate in November, reaching its highest level this year.

* In the wake of rising anti-globalisation sentiment, Peruvian President Pedro Pablo Kuczynski said “We have to give an unequivocal message to the world that trade continues being beneficial” and called for “protectionism to be defeated.”

* Japanese Prime Minister Shinzo Abe said that the Trans-Pacific Partnership “has no meaning” without the US, showing further frustration at president-elect Donald Trump’s vow to withdraw from the trade pact.

* US equities rose to fresh highs, with the Dow Jones Industrial Average rising above 19000 for the first time and the S&P reaching a new peak, on the back on market optimism on the stimulative effect of a Trump presidency.

* The Wall Street Journal reports that in the week ending 18th November investors staked a record $2.1tn on rising US short-term interest rates, via futures markets, in the latest sign of Mr Trump’s election victory shaping financial market activity.

* Martin Schulz announced his intention to stand down as president of the European Commission to seek a seat in the German Bundestag, fuelling speculation that he could enter the race to challenge Angela Merkel in next year’s federal elections.

* Projections from the Institute for Fiscal Studies suggest British workers face “more than a decade without real earnings growth” – potentially enduring the worst period for pay in at least 70 years – as weak productivity growth and rising inflation hits pay packets.

* President-elect Donald Trump tweeted “Many people would like to see @Nigel_Farage represent Great Britain as their Ambassador to the United States. He would do a great job!”

* According to the latest edition of Harden’s London Restaurants, a record number of restaurants opened in the capital in the last year, although there was also a sharp rise in closures – with this “churn” highlighting intense competition in the sector.

* China-based inventors applied for a record number of patents last year, according to an annual report by the World Intellectual Property Organization, who claimed the figure of more than a million patent submissions is “extraordinary”.

* Fewer than 40% of Japan’s under-30s see bright futures and successful careers ahead, making them the most pessimistic group of millennials in 18 countries surveyed by ManpowerGroup – with more than a third saying they expect to work until they die.

Brexit and European politics

* In the first official assessment of the potential economic costs of Brexit, the Office for Budget Responsibility estimated the UK government will have to borrow £120bn extra than it had planned over this parliament, with £59bn of this because of Britain leaving the EU.

* The president of the European Court of Justice, Koen Lenaerts, warned in an interview with the FT that there are many potential legal issues surrounding Brexit, and “many, many different ways” for the process to end up before the Luxembourg court.

* The European Parliament voted by a large majority to ask European governments to suspend talks with Turkey on EU membership, escalating tensions between the EU and President Recep Tayyip Erdogan.

* President Erdogan reacted angrily to the vote and warned Brussels he would allow 3-3.5m refugees to cross over the border in to Europe unless they soften their stance.

* Support for the EU has risen among member states since the Brexit vote according to a new survey by Germany’s Bertelsmann Foundation, who found 62% of those polled would vote to stay in the EU compared with 57% polled in March.

* British food exports to non-EU countries have grown at twice the rate of those to EU countries this quarter – led by sales of chocolate, salmon and cheese – providing cheer to those who argue that Brexit will free Britain to trade more with the rest of the world.

* In his first intervention on the issue since the referendum, former Prime Minister John Major said in a speech that the departure of Britain from the EU must not be dictated by the “tyranny of the majority” – arguing the 48% who voted remain should also have a say.

And finally…

* New figures show that sales of fizzy drink Irn-Bru in the British Parliament have risen 60% since the success of the Scottish National Party in the 2015 General Election, when the party gained 50 MPs to become the third biggest party in Westminster – Red White and Bru.

Ian Stewart is  Deloitte’s Chief Economist in the UK. His Monday Briefing can be subscribed to here.