Sand in the Gears of Globalization

[Note: The following essay was published in the 4 February 2002 Issue of
Newsweek International.]

Globalization is in trouble. One of its key premises increasingly
frictionless cross-border connectivity is in doubt as the world responds
to terrorism. The events of September 11 have imposed the equivalent of
a new tax on trade, capital and information flows. National borders
will have to be tightened. Cross-border transfers will take longer.
Insurance rates on shipping will go up, as will premiums for worker
compensation. Morgan Stanley estimates that U.S. commercial insurance
premiums could rise from $148 billion in 2000 to the $210
billion-to-$240 billion range in 2002. That would be a sizable dent in
the earnings of corporate America, currently about $450 billion for all
nonfinancial companies.

The instant transfer of information can no longer be taken for granted,
either. The Nimda computer virus that disrupted global networks in
September is an example of e-terror, which slaps yet another tax on
cross-border connectivity. There are signs that businesses are tilting
software budgets increasingly toward disaster-recovery services,
security firewalls and antivirus programs, and backup and recovery
systems. A Morgan Stanley tally of chief information officers for
America s 225 largest technology users found that 34 percent attached
the highest priority to computer security in December 2001, up sharply
from 16 percent in September. The events of September 11 have imposed
the equivalent of a new tax on trade, capital and information flows.

September 11 has instilled fear about what might come next. To the
extent that multinationals have begun to rethink the strategy of
outsourcing production to a global network, the risk premium of
globalization has just gone up. That undermines the global earnings
stream of multinationals, and the disinflation and productivity gains
that come from outsourcing. Basic economics says that a tax on
cross-border connectivity will undoubtedly reduce international flows.
Suddenly, the brave new world looks a lot less frictionless than it did
before. There is sand in the gears of global commerce.

The costs of terror are one thing. But globalization now faces
challenges from the business cycle, too. The world is in a rare
synchronous recession: all the major economies are stumbling at the
same time. This is unusual for three reasons. First, the global economy
is more dependent than ever on trade, which now accounts for a 24
percent share of world GDP. That s well in excess of shares prevailing
in two earlier synchronous global recessions 17 percent in 1975 and 19
percent in 1982. Second, the world faces the sharpest ever boom-bust in
trade. Global trade volumes surged by a record 12.4 percent in 2000 but
shriveled after the pop of the tech bubble, with 2001 likely to show an
increase under 1 percent.

Third, the world has become unbalanced, far too dependent on the
American growth machine. The United States accounted for about 40
percent of growth in world GDP in the five years ending in mid-2000,
nearly double its share of total world GDP. So it s not surprising that
recession in America quickly became the world s recession. That s
hardly a testament to the greater balance in the world economy that
globalization was supposed to bring.

There s always a chance of making too much of September 11. The defense
of globalization rests largely on the impeccable logic of free
trade that the rising tide of global trade lifts all boats. But it s not
the theory that is in question. It s the relevance of the theory to a
world very different from the one most models of globalization
envision. Terror has imposed new taxes on free trade, exacerbating a
lethal synchronous recession that makes it increasingly difficult for
governments to resist protectionist pressures. Trade frictions are
rising especially between Europe and the United States, as well as
between Japan and China eroding the harmony that globalization was long
thought to bring.

In the years ahead, the world economy is likely to grow more slowly,
especially when compared with the roaring 1990s. Most important, this
reflects a likely reduction in productivity growth, the principal source
of economic dynamism. The war against terrorism raises business

operating costs increasing outlays to cover office, mailroom and
cybersecurity, insurance and shipping premiums, and the need to carry
more inventory as a hedge against transportation disruptions. Add to
that a likely increase in defense and homeland security, and it is safe
to conclude that more inputs will be required to generate national
output placing a lasting drag on productivity.

Diminished globalization will sap growth. So will America s hangover
from excesses of the 1990s low savings, high debt, excess capacity and a
massive current-account deficit. Underlying growth in the U.S. economy
could slow from about 4 percent in the late 1990s to the 2.5 to 3
percent range. Unless the world uncovers a new growth engine, September
11 could well have marked a critical turning point for the global
economy.

Stephen Roach (New York)

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