4 June 2009

Globalization Dented, not Derailed

The following was written by Stephen S. Poloz, Senior Vice-President, Financing Products Group, Export Development Canada.

Globalization always rubs some people the wrong way, but this is especially the case during recessions. This one is worse than usual, because many blame globalization for the contagion that brought the U.S. financial crisis and economic downturn to their shores.
Protectionist rhetoric and practice is on the rise, and there has been a sharp decline in international trade flows. With transportation costs creeping higher, and some predicting an eventual return to sky-high energy costs, it would seem that globalization faces its own perfect storm.

Obviously, there is more than one way to look at this, but let’s begin by carefully defining globalization. Most would agree that globalization refers to the emergence of borderless business. One manifestation of this trend is the development of global supply chains, where companies fragment their production processes just as they would if they were in a single building, but instead locate each process in a specialized facility located anywhere in the world that makes good business sense. The processes are then connected by international trade, rather than by a conveyor belt – our trade dependence rises.

That’s a good definition, but not the whole picture. A second manifestation of globalization is cross-border investment, as some companies replicate their operations in their target sales markets. To illustrate, Canadian companies have levels of sales from their foreign-based affiliates that are about the same order of magnitude as total Canadian exports. These sales do not show up in our basic trade statistics, but they are very important to Canadian incomes and to the sustainability of our companies.

Accordingly, a company that is targeting a global customer has a variety of options, all of which show up as increased globalization – import parts from foreign suppliers, and export the finished product from Canada; invest in a foreign operation and export key parts from Canada and sell the finished product to the world (including Canada) from that location; or some complex combination in between.

Now, introduce one or two irritants to this picture, such as the U.S. “buy America” clause. Such a policy obviously has a direct negative impact on non-U.S. suppliers. But that is only the first stage. Most of the stimulus funds will find their way into U.S. workers’ pockets, who will shop wherever they want for whatever goods and services they want, regardless of where they are produced. And, companies will eventually invest their way around such protectionist barriers, just as they have done in the past.

Similarly, if the world moves to a new era of ultra-expensive energy, then the optimal mix of trade-facilitated production and cross-border investment will obviously shift. But it will also make investments in massive, fuel-efficient ships and deep-water ports viable, which will alter that optimal mix again. What globalization gives us is more options to adapt to shocks, which is another way of saying that it gives us more resilience. Those who see globalization as having increased our vulnerability to shocks recently need to consider what our performance might have been were we truly isolated – consider the benefits of the international coordination of monetary and fiscal policies we have seen, for example.

The bottom line? Globalization of business is not some passing fad. It is the natural order of things. Better to think of globalization as a force of nature, to which resistance is futile. Recessions, protectionism and other economic considerations will alter the mix of globalization, certainly, but will not counter the underlying force – in other words, they will prove to be dents, not de