Is Globalization Good for Us?

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When I was a young lad, a mentor told me to start thinking globally if I ever wanted to go to an Ivy League school. He gave me a copy of The World is Flat by Thomas Friedman to get started.

The basic idea of the book is that globalization is an unstoppable force that breaks down geographic barriers for the benefit of the world.

The spread of globalization means that where you're from matters less than what you contribute to the global ecosystem. In a fully globalized world, we all benefit from more access to opportunity, talent, goods, and services.

My takeaway when I read Friedman's book 12 years ago was that globalization is a really positive thing for the world.

Like any system, globalization has winners and losers, but the net effect is that the world ends up far better off than if we stayed in geographically constrained environments. The US may lose manufacturing jobs to countries with a lower cost of labor, but we all end up with cheaper access to life-enhancing goods.

What's interesting is that Friedman's vision of a globalized world played out at a faster pace than even he expected. Supply chains, labor markets, and countries blended together at break-neck speeds that greatly benefited the innovators and people who offered the most value at the cheapest cost.

Until a few years ago, I probably would have argued that the pace of globalization has been an overwhelmingly positive development that should continue until opportunity is equalized across the world.

I'm now realizing that there are hidden costs of a hyper-globalized world that I didn't previously consider.

The last two years have revealed some of these costs.

For example, with the Covid-19 pandemic, we saw how the global integration of our supply chains can lead to shortages of critical goods that we thought would always be there. As countries began to optimize for their own needs and supply chain disruptions started, we were left without access to certain resources we needed to combat the pandemic.

In the last month, we've seen another downside of interdependent systems. With the Russia-Ukraine conflict, Europe's dependence on energy exports from Russia has dampened the West's ability to respond to Russia's aggression in Ukraine. More on that in a minute.

These two events have made me wonder whether we have under-appreciated certain tradeoffs in the pursuit of globalization.

This week, Howard Marks helped clarify some of my thinking on the topic. In The Pendulum in International Affairs, he discusses the tradeoffs of globalization in the context of the Russia-Ukraine crisis and the supply chain disruptions that began with the pandemic.

Starting with the Russia-Ukraine conflict, Marks describes how the West has attempted to curb Russia's aggression in Ukraine with sanctions. Some of these sanctions have been heavy, but the most damaging possible sanctions – those related to Russia's energy exports – have been off limits.

Why are they off limits? Globalization is at least part of the answer. Over the last few decades, Europe has become increasingly dependent on Russia's energy exports. And because they can't easily scale up domestic energy production and distribution, their hands are tied.

Marks correctly asserts that the energy issue has four core factors: energy, climate, security, and economics.

The energy policy that a country pursues is related to how they prioritize these four factors. In recent years, Europe has prioritized the climate piece of the energy equation. To curb the negative impact of their activities on the environment, many European countries have reduced domestic energy production and turned to foreign sources of energy like Russia.

That appeared to be a sensible approach until Russia acted in an aggressive way that the world did not expect. Now European countries find themselves in a precarious position. That position is related to how they chose to prioritize the four variables in the energy equation.

By prioritizing climate considerations and underestimating the way in which domestic energy production can increase security in times when a foreign actor goes rogue, Europe finds itself in a suboptimal situation.

A similar dynamic has happened with supply chains.

As the profit-maximizing impulse of capitalism has led companies to outsource labor and production to countries with low-cost labor and lower working condition standards, consumers have benefited from the lower prices fueled by an increasingly globalized world.

That trend has been mostly beneficial for consumers, but it has created a greater dependence on other countries in which these goods are produced.

For example, the pandemic spurred a global shortage of semiconductors. That may not be a problem if we could easily scale up semiconductor demand and if these chips weren't used in most of the items that have become indispensable to our lives.

But that's not the case.

Semiconductor design and production takes billions of dollars of upfront investment and many years of iteration to replicate the sophisticated capabilities that top chip producers have today.

Even if we put all of the capital and talent in the world toward making Intel operate as well as Taiwan Semiconductors, we may not be able to do it. That's a dangerous position to be in, especially if a country like China decided to invade Taiwan.

As Marks points out, we prioritized profit over security in the development of our supply chains, and that has revealed a surprisingly high degree of fragility in our current systems.

"Just as Europe allowed its energy dependence to increase due to its desire to be more green, U.S. businesses came to rely increasingly on materials, components, and finished goods from abroad to remain price-competitive and deliver greater profits."

In last week's Life Reimagined, I talked about how life is like a pendulum. It swings between joy and sorrow, bliss and pain, courage and fear. Everything is in constant flux. The pendulum that keeps swinging.

This pendulum also applies to our current discussion about energy and supply chain dependence.

There is a pendulum that swings between hyper-globalization and hyper-localization.

In the Pax America that followed the second world war, the pendulum swung heavily toward globalization, which has led to unprecedented innovation and quality of life improvements.

In the time of peace and prosperity, we indexed toward the lowest cost or greenest forms of production.

But it's now clear that prioritizing cost at the expense of everything else can lead to suboptimal outcomes when global crises and misalignments occur.

We're faced with a difficult question – how do we rebalance the pendulum to recognize that globalization taken to its fullest form may cause risks to things like security or threats to peace?

Marks suggests that our prioritization equation may be shifting:

"Rather than the cheapest, easier and greenest sources, there'll probably be more of a premium put on the safest and surest."

We're already seeing US companies announcing that they are building more production capacity at home. Especially in the case of semiconductors, we're waking up to the fact that we can't depend on a few companies overseas that may be subject to geopolitical turmoil.

The world is once again has proved to be more complex than it seems.

A new battle is emerging between dependability and security on one side of the pendulum and the desire for cheap sourcing on the other end.

Global GDP has benefited greatly from our prioritization of cheap sourcing over the last few decades, but perhaps it's time to give up some profit to increase the reliability of the systems that run our world.

I don't have the answers, but I do know that these types of tradeoffs that we're seeing exist across all areas of life as well.

Do I pursue my passion with a low probability of financial success and a high probability of fulfillment, or do I take a stable 9 to 5 job that doesn't get me going, but that will at least allow me to pay the bills at night?

Should the government allow the free market and its excesses to reign freely and accept the glory and peril of that, or should regulation play a larger role in leading how companies and lives are regulated?

It appears that most questions in life exist on a pendulum that has tradeoffs on both sides. There is no "right" answer.

As to what will happen with globalization moving forward, only time will reveal the answers.

 — Cal

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