The Dark Side of Globalization

Given its many benefits (the case is compelling), it's not often that we hear of the deterrents of globalization. It is in many ways, an academician's dream come true: abundant supplies of international labor, a focus on core competencies and competitive advantages, and global competition all working together to, in theory, reduce friction and unfair business practices.

Corporation acquisitions are at the very heart of creating global institutions. However, as each fish is swallowed by yet a bigger fish we are left with a series of very large and very interconnected companies. The financial sector offers the clearest picture of this: through a series of derivative contracts, the well-being of nearly every major financial institution in the world was linked to the well-being of nearly every one of its competitors. This left the government with no choice but to bail out the struggling firms.

However, this does not stop at the financial sector. Both General Motors and Chrysler were deemed "too big to fail", as their many suppliers and dealers would have collapsed under the weight of their insolvency. The simple fact is that global interconnectedness up and down the supply chain, just-in-time inventory management, and round-the-clock production creates hundreds of "too big to fail" companies. Imagine the impact if Walmart faced significant solvency problems, or if Tyson had to dramatically scale back their chicken operations, or if Whirlpool had to halt washer & dryer production.

Starting yesterday, the bond markets began to identify with this (financial markets are very useful in identifying trends before the mainstream media reports on them): investors are demanding a higher yield from ten year Treasury notes than they are for ten years worth of a synthetic bucket of inter-bank risk. Some take this as the market indicating that the US government's debt isn't nearly as secure an investment as it used to be. Today the papers took note: see Debt Concerns Send Treasury Rates Higher in the Wall Street Journal. (I should note that "too big to fail" isn't the only cause of this phenomenon — the markets are expressing discontent with healthcare and broader government spending as well).

The steps leading here have been tortuous yet measured. A failure to enforce anti-trust rules has allowed for corporate players that are unseemly and large. As is usual, the matter is not as cut and dry as it appears. As we will see, however, many US businesses were responding to outward pressures from foreign competition.