In his conversation with Tyler Cowen, this theme was not as pervasive as contrarianism, but I found it more interesting and more provocative. Thiel’s view is that globalization has peaked. Therefore, companies and cities that are tied closely to globalization will decline relative to companies and cities that are less outward looking. So Texas will do better than Virginia, because Texas is focused on its own domestic production, while Virginia’s strength (I would say this only about Northern Virginia, by the way) is its military and diplomatic connections overseas.
Think about the notion “globalization has peaked” from a PSST perspective. Economic activity consists of patterns of sustainable specialization and trade. Globalization means that new patterns are being created across countries more rapidly than within countries. What would drive that differential, and what would slow it down?
Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.
One possibility is that the cost of setting international patterns fell as China and India allowed their economic institutions to conform more readily to U.S. standards. However, over time, as China and India climb their way into the middle class, international comparative advantage is being reduced. There was an infamous paper by Samuelson that envisioned such a scenario. (It was perhaps his last academic publication, and it was not well received, because he seemed to disparage free trade.)
Another possibility is that the “low-hanging fruit” of reasonably low fixed cost international setups has been picked. Manufacturing and call centers can be moved offshore at moderate cost. With the New Commanding Heights industries of education and health care, it is much more difficult.
Another possibility is that globalization has not peaked.
You are leaving out the political considerations that could dampen globalization. Transit through the Suez is getting more risky every day. There are pirates off the Somali coast, the Islamists are taking Yemen which guards the southern entrance of the Red Sea. The Eastern Mediterranean could blow up, either in hostilities of regional war or literally with Iran, the Bomb and Israel. Although in moderation, Egypt, India and China have reason to use force to keep trade flowing between Europe and the Indian Ocean. Then we have China making moves to militarize offshore rocks with their artificial reef projects which could bring hostilities to that region.
When these political considerations are added in, having inward looking investment and specialization gets a boost. Throw in robotics which reduce the cheap labor advantage and the rise in labor costs that PSST causes in current globalization centers and you have a mix supporting shortening the supply chains.
Yeah, that was my thought, too. Resurgent nationalism in Russia, China, India, Burma, etc. can throw a bit of a monkey wrench into this whole One World, One People, One Market plan.
Or peaked as far as the developed world but still with some way to go in the developing world.
The double-edged sword of factor price equalization means today’s globalization beneficiaries may be tomorrow’s victims.
The comparative advantage of Globalization is lower manufacturing costs.
The comparative advantage of close to market manufacturing is smaller manufacturing order size and much shorter shipping lead times.
Technology is rapidly reducing the advantage gap between high volume and low volume manufacturing, but there is no tech on the horizon that will reduce the comparative advantage of order size and lead times that is possible by being close to market.
Local wins.
Consider the latest from Hanson via Sumner via Justin Fox – which shows that intangible assets as percent of market cap of the largest US corporations has gone from 1/6th to 5/6ths in the last 40 years.
I have two interpretations:
1. Hanson’s ‘selection’ explanation is the correct one; anything that was easy to ‘copy’ was copied / stolen / outsourced abroad if there was any factor cost benefit whatsoever. Most of what’s left is hard-to-mimic intangibles, organizational capital, and non-outsourceable services. Arguably the US went from being a more ‘balanced, full-spectrum’ economy to one that focused increasingly on a few export industries where it has a comparative advantage, but also on the non-tradables sector. That’s our experience of ‘globalization’.
2. The pace of globalization, and the income to be derived from outsourcing arbitrage, creative destruction, and comparative-advantage-focusing-reallocation opportunities, is something like the derivative of that bar chart leading Hanson’s post. That ‘tangibles transfer’ rate would indeed peak and slow down as the process nears completion and countries settle in to their distinct economic characters. If that’s true, then Thiel seems to be right about the peaking.
So, is it the 2nd derivative, the first, or the absolute level peaking?
Arnold:
You said,
“Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.” [emphasis mine]
While I completely agree with what you were trying to say, referring to “fixed costs” in this context is a gross misnomer. Especially in an accounting sense, “fixed costs” refer to costs associated with ongoing business costs which are fixed, not start-up costs. An initial capitalization – start-up costs – can only be considered a “fixed cost” on an on-going basis if it is done via debt instead of equity capitalization. The debt service costs become a “fixed cost” in an accounting sense, but there are no “fixed costs” associated with equity capitalization. That is the most prominent explanation of why businesses attempt to finance initial “start-up costs” as well as many expansion costs with equity capital, rather than debt – to keep on-going debt service “fixed costs” low.
Understanding that distinction, and understanding its implications, may explain a great deal about current and emerging patterns, comparative advantage, and a variety of other current business phenomena.
And it helps explain why globalization isn’t dead.
Arnold (and others) – a quick follow-up:
I would also urge considering the economic concept of comparative advantage ONLY in terms of opportunity costs – not accounting costs.