Of course, this is dramatic. Of course, the markets are declining.
Because if you take Donald Trump to his word (something that investors are finally starting to do), he tries by hand to turn and uproot the economic history of a few months.
Because if it’s really ‘the end of globalization’, like some politicians, including Keir Starmer, now calling it, it’s one of the most poignant, painful episodes in modern times.
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To see what I mean, the best place to start is by reflecting on the hidden life of the device on which you read it. I assume it is a smartphone, specifically the latest iPhone, but most of the following money for other smartphones and indeed many laptops or table computers.
The show was made in South Korea or Japan. The cameram module was made by Sony in Japan (which has a specific expertise in this kind of specialized silicon that few other companies could fit). The batteries (at least for the latest iPhone) are made in India, although the vast majority of the world’s cells are made in China these days.
It goes -the memory chips of South Korea, which have a close monopoly on the storage of solid state. The logical discs – those that help “think” the device – made in Taiwan, although with intellectual property (IP) from all over the world, including America and even Britain. Some of the chips indeed come from the US – especially the modem, although the company behind them (Qualcomm) sometimes manufactures in Taiwan. But there are also some from Europe – especially the spatial sensor chips that come from Bosch in Germany.
Globalization is in your hands
If you are looking for an example of ‘globalization’, you may not do much better than the smartphone. But even this geographical lesson of the geographical nature underestimates this because the manufacturing plants in Taiwan and South Korea, which turn out the silicon chips that help the phone to think and remember things, are completely dependent on machines made by a company called ASML, based in the Netherlands. Those Dutch machines, in turn, contain components of hundreds of other companies around the world, including in Germany and the US. It goes.
This degree of interconnectedness cannot be found in high-tech equipment. The other day I was in scunthorpe At the ovens of British Steel. It seems that the iron they melted there is not just in the rails that this country is staring. They also make the steel that goes into the tracks of Caterpillar trucks.
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That’s right: The iconic trackers – for many people the most American of all things – are all on steel “lane shoes” mounted in the North East of England (the plant is a little further north of Scunthorpe, in skinningrove).
The further you look into the world of manufactured products, the more you realize that almost everything you touch daily, in the months before it arrived in your life, was on a long journey from factory to factory and took it around the world. That device you read about this may say “Made in China” at the back, but it’s an enormous transfer. It was made more or less everywhere.
This is the way the world works today – as it or not. In a sense, this is the ultimate expansion of what Adam Smith discussed in the earliest days of the economy, when he described a ‘pin factory’ where the work to make a simple pin is divided between different people, with each worker specializing in a specific task rather than trying to make the entire PIN himself.
The swings and roundabouts of globalization
Today we have a kind of international labor distribution. Today, almost everyone goes to China to get their batteries. They go to South Korea to get their memory chips. The stir is that these factories have become increasingly efficient to make their products. And – here’s where it is important to the rest of us – the price of making this good and buying is dropping.
The reason why one can buy today that would have been classified as a super computer for several hundred pounds is because of this division of labor. Globalization made everything from computers to caterpillar trucks to T-shirts, which are cheaper than they would have been if we tried to manufacture everyone in a single country.
Merchant Christopher Lagana. Pic: ap
But the ugly side of this economic shift is that the regions that previously did the manufacture – whether the ‘rust belt’ of America or the Midlands and North East of England – have disappeared much of their traditional work. And although economists have insisted that cheaper products all do better in net terms, the reality is that these parts of our countries have not fared better. They were hollowed out. And over time, resentment has built up globalization – for good reason.
Trump’s pursuit
This is the world we inhabit today. Picking it will be phenomenally difficult and phenomenally expensive. Relating all of these features – factories and labor markets with expertise built up over decades – would be incredibly difficult and it will take a long time. But it seems, as far as anyone can know, the pursuit of Donald Trump is. That seems to be the purpose of his tariff policy.
So far, most investors have accepted that the president was not quite serious about this – that he was simply intended to open some Asian businesses in the opening factories in the most important swing states. And who knows – that could be the case. But he certainly looks more serious this time – and less phased by the negative market reaction.
Meanwhile, we are sitting with the rates.
Cost will rise
Think back to that iPhone. Think back to those caterpillars. All the components are now facing swinging rates when they arrive in the US. This will increase the costs associated with buying just about everything in the US and reduce the demand for the goods accordingly. And since America is the world’s consumer of the last resort – the largest importer of goods anywhere – which has a huge impact on demand around the world.
So, yes, of course it’s dramatic. Of course, the markets are declining. No one knows what the US president will do next. But anyway, what happened in the rose garden last week will still sound for a long time.
