You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

Pain at the Port

Will rising gas prices put an end to globalization?

Ikea’s rural Virginia factory should be convincing evidence that globalization is on the march. But a New York Times article last week marshaled it as proof that, on the contrary, “[G]lobalization may be losing some of the inexorable economic power it had for much of the past quarter-century.” The Ikea plant, according to the paper of record, is evidence that “globe-spanning supply chains--Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago--make less sense today than they did a few years ago.” And the Times isn’t alone in this view. “De-globalization” is a hot topic among economists and policymakers, many of whom are convinced that rising oil prices will erode the decades-long integration of international economies. “Globalization,” concluded Jeff Rubin and Benjamin Tal in a much-discussed May report for CIBC World Markets, “is reversible.”

But that kind of logic misreads the economic imperatives behind contemporary globalization. Thanks to the explosion of middle-class consumers in the developing world and the unleashing of trillions in international capital, it’s about a global web of investors, producers, and consumers that constantly shifts to maximize profit and reduce prices. For the last 40 years, this has meant moving a plant to a developing country to take advantage of low-cost labor. And yes, as oil prices rise, it will mean moving production closer to the end consumers. But the underlying calculus--that capital will seek the most efficient way of bringing goods to consumers, anywhere in the world--remains the same.

In fact, if the defining point of globalization is not the erosion of national borders, but the flexibility that a borderless world makes possible, high fuel prices could end up furthering, rather than halting, globalization. It just won’t look like the globalization we’re used to.

If we were to view the thousands of orange shipping containers stacked on docks from Rotterdam to Oakland as the definitive barometer of globalization--the more there are, the faster the world is integrating--it would look like we were in trouble. “Including inland costs, shipping a standard 40-foot container from Shanghai to the U.S. eastern seaboard now costs $8,000,” note Rubin and Tal. “In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container.”

But shipping volume is an obviously imperfect measure of economic globalization. The critical driver behind globalization isn’t the movement of goods, but the movement of capital that allows international trade in the first place. And there’s more capital now than ever before. Over the last two decades, trillions of dollars have been unleashed on international markets, which in turn has facilitated explosive growth in the developing world. According to the Economist Intelligence Unit, between 2003 and 2007 alone, foreign direct investment (FDI)--capital that flows from one country to another--went from $563.4 billion to $1.47 trillion.

Capital, naturally, is going to funnel into the most profitable investments. For a long time, when it came to FDI, that meant investing in developing-world manufacturers, which used cheap labor to produce cheap goods for export back to the developed world. Globalization was a one-way street.

But with the rise of sizable middle classes in China, India, the Persian Gulf, and Eastern Europe, the global manufacturing economy has become dramatically more complex. FDI is no longer just about producing goods for the developed world; it’s about local markets as well. Contrary to popular belief, most American-owned factories in China these days aren’t producing widgets for Wichita, but baubles for Beijing. According to a 2007 paper by Carnegie Mellon’s Lee Branstetter and Harvard Business School’s C. Fritz Foley, $39.7 billion in sales by U.S.-owned affiliates in China were in the domestic market, while just $3.7 billion came back to the United States in the form of imports.

Such free-flowing, multidirectional capital means that higher oil costs are less of a dam holding back globalization than a rock in a stream: Capital will simply find a way around it. As it gets more expensive to export goods, investors will push for expanding manufacturing capacities closer to their end-consumers. American machinery firms like Caterpillar and Cummins, two of the media’s poster children for globalization, both get the bulk of their revenue internationally. But a significant portion of that comes through foreign subsidiaries--there is not as much money to be made building earthmovers in Peoria for shipment to Japan. As oil prices continue to rise, expect more American exporters to follow suit.

The reverse--foreign importers moving to the United States--is true, too. In the early 1980s, Japanese auto makers realized it was a better deal to build hatchbacks in South Carolina than haul them from Tokyo. And Ikea opened its Danville plant because it was becoming prohibitively expensive to move cheap kitchen tables from Sweden. The high cost of shipping didn’t force Ikea to cede the U.S. market or, more broadly, its strategy of international expansion. Instead, it doubled down.

The New York Times had it exactly backwards. Rising fuel costs spur globalization, by moving the world economy from a series of supply chains to a constellation of supply networks. If a Japanese bicycle maker gets an order from Shanghai, it might draw components from factories in Kuala Lumpur, Chiang Mai, and Taipei; if the order comes from Tel Aviv, it might go through Chennai and Mumbai, depending on fuel costs and other factors. But making that sort of decision takes truly globalized companies, companies with multiple regional offices and ready access to international capital flows--not to mention international office cultures and multilingual executives. And, precisely because of higher energy prices, we are likely to see more, not less, of them.

The parallel emergence of a worldwide consuming public and an ongoing flow of international investment capital means that globalization is no longer a creeping phenomenon, one that can be rolled back simply by higher energy costs. In today’s truly borderless world, supply and demand will find a way to meet. Rising oil prices might mean that Americans will buy fewer rattan chairs made in Indonesia. But thanks to the globalized market, they can buy Swedish sofas made in Virginia instead.

Clay Risen is managing editor of Democracy: A Journal of Ideas and a contributing editor at World Trade. His first book, A Nation on Fire: America in the Wake of the King Assassination will appear in January.