The Changing World

The world is changing, and politicians can’t keep up.

From the New York Times:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Paul Krugman adds:

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

The point is that manufacturing plants don’t exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand. This is the kind of stuff I emphasized in my own work on both trade and economic geography.

As I wrote in October:

Looking at global population density — with American taxpayers subsidising the cost of a flat global marketplace — where can we expect productivity to agglomerate?

The high-density zones. But it was not always thus, because the world was not always flat. Technological, intellectual and social infrastructure once dictated that the agglomeration of manufacturing, skills and industry took place in the West. Development spirals into greater development. Alas, the world was flattened under the aegis of American imperial grandeur, and so capital, skills, supply chains, and so forth took off to where the labour was cheaper, the population denser, regulations laxer, and factories clustered:

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

This agglomeration presents a geostrategic challenge to America that I am yet to see other commentators recognise. As America’s productivity has gone overseas, America has not really experienced many negative effects beyond the obvious problem of job migration. That’s because as the originator of the global reserve currency, other nations need dollars. That has meant that the fruits of the Earth, and the world’s labour have flowed and flowed into America irrespective of America’s own productive decline.

America’s internal workings — her agriculture, her internal transport network, her consumption, and indeed even her internal manufacturing (and so forth) — are dependent on a global system of resource extraction, labour, production and shipping. More or less, America is dependent on foreign energy and goods, and her foreign policy is geared toward sustaining the global flow of energy and goods. That’s why America spends more on her military than any other nation, and over 50% of the global total. However this has meant great debt, as America is producing far less than she is spending.

So does that mean globalisation is bad? No — I am all for free trade, and global markets, and that requires a degree of security. But at the same time, free markets require proper pricing mechanisms. American manufacturing has been out-competed in the American market predominantly because Chinese products do not accurately reflect the costs of global security; those costs are reflected not in prices, but in the Pentagon’s budget, and in Federal deficits. Those cheaper Chinese goods might not have put so much American industry — and subsequently industrial infrastructure — out of business without that subsidy; for a start shipping would be costlier and less reliable. With a less obvious advantage in selling to the American market, it is likely that both China’s growth, and America’s decline would have been slower.

So America’s rising government debt burden, and America’s lost industrial infrastructure are in at least one way two sides of the same coin. Less world policeman would not only mean less debt, but more domestic industry.

These concerns are reflected in Obama’s recently announced foreign policy and global defence doctrine:.

From the Washington Post:

President Obama pledged that the $489 billion in defense cuts he has proposed over 10 years would be governed by a concerted strategy, and on Thursday he delivered one. At the Pentagon, Mr. Obama unveiled a “strategic guidance,” which aides said reflected a considerable investment of his personal time and ideas. The president’s thesis is that the need for fiscal austerity coincides with a global “moment of transition,” in which the United States is winding down a decade of land wars in Iraq and Afghanistan and facing the need to turn toward a very different set of challenges, particularly in Asia.

Several previous administrations have tried to shift to Asia from the messy Middle East, only to be dragged back by wars, terrorists, turmoil and the unending need to protect allies and the flow of oil. The Obama strategy acknowledges that history and says this pivot will be different. The means to reduce spending and build capacity in Asia, it suggests, will come not from the Mideast but from U.S. deployments in Europe, benefit and retirement costs, Cold War weapons systems and the U.S. nuclear arsenal.

The trouble is, this is much too little much too late. Had President Bush announced this in 2002 (or President H.W. Bush in 1992) years of fruitless imperialism in the middle east and trillions in debt might have been avoided. American industry, supply chains, technology, industrial infrastructure and skills have already been gutted; as Steve Jobs alluded to, the iPhone will never be made in America. America is still deeply dependent on foreign oil.

More or less, this strategy is trying to close the stable door after the horse has bolted.

The effects of decades of policy will be hard to mitigate. America must face the fact that her most important export — dollars and Treasury bonds — will be blighted by the end of the dollar as the global reserve currency.

A significant number of Eurasian nations — including Japan, India, China, Russia and Iran — have pledged to in future conduct bilateral (and surely soon also multi-lateral) trade in their own domestic currencies, including for trade in oil and other commodities.

The impact of this would be disastrous. Simply, nations would not need to sell their wares and resources to America; a hostile Chinese or Arab regime could foreseeably cut America off from essential resources, components or goods. China already limits exports in rare earth metals. How long before nations feel capable of blackmailing America by withholding or heavily taxing resources, goods and components on which America depends?

Hawks might respond that no nation on Earth would feel capable of doing that, because America has the military clout to bite back. But for all of Obama’s assertions that the military is refocussing on the Asia-Pacific, America is too broke to start a war or proxy war with her great creditor. More importantly, such an event would probably shut down or slow the flow of global goods and energy meaning immediate and disastrous economic consequences for America.

America could be taking every step imaginable to make herself energy independent  (or at least dependent only on North American energy) as soon as possible as a matter of urgent national security. This would be a solid base from which to build. Alas, Obama totally rejected the Keystone XL Pipeline, which could have formed a major plank toward this goal.

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