In the complex networks of globalization, nodes can simultaneously become “choke points,” notes Wharton School business professor Stephen J. Kobrin. When any one of them fails, it threatens the entire network—a reality that became almost comically apparent this week when a container vessel the length of the Empire State Building wedged its bulbous nose into a bank of the Suez Canal, blocking the waterway and causing a shipping backup north to the Mediterranean, south to the Red Sea, and beyond.
Puny by comparison, the image of a digger trying to extricate the colossal vessel became an instant social media meme. More prosaically, the stranded Ever Given has become an apt symbol for the fate of globalization, the latest wave of which was spurred—somewhat ironically—by the invention of the shipping container in 1956. (The Ever Given can transport up to 20,000 of these big metal boxes, each of which can fit on a tractor-trailer.)
If the 2008 financial crisis exposed the risks of contagion as a result of global financial integration, the pandemic has highlighted the perils of unbridled interdependence in trade. The first shock helped immiserate the middle classes across the industrialized West and led to a populist backlash against globalization. Covid-19 has damaged the globalization project even further by highlighting the fragility of supply chains, as well as the mounting risks of viral contagion in an interconnected world.
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A digger clears the area around the bow of the stuck Ever Given on March 25.
Source: Suez Canal Authority
This week in the New Economy
Global manufacturing has become over-concentrated, reflecting a corporate obsession with cost and efficiency over safety and sustainability. When the coronavirus took off in the U.S., it exposed the fact that almost half of the country’s personal protective equipment is made in factories in China. Suddenly, those production nodes became choke points.
Now that an unexpectedly swift economic recovery seems to be taking hold, nodes are seizing up everywhere. Semiconductor foundries can’t keep up with demand from carmakers. Ports are congested, especially at America’s largest in Los Angeles, and shipping containers are in short supply. The Japanese-owned Ever Given has exacerbated these problems by severing a critical artery that usually carries 12% of global trade.
Advocates of globalization tend to focus on linkages enabled by digital technologies, like Zoom video conferencing, that have kept office workers busy during Covid lockdowns. “I am a technological determinist,” declared Tom Friedman, the New York Times author of “The World is Flat.” He adds that “technology is not just interconnecting the world: it’s actually making the world interdependent.”
Excessively so, caution the skeptics. And while the march of technology may be inevitable, the way production has become ultra-specialized is fueling dangerous uncertainties.
A chip wafer made by Taiwan Semiconductor Manufacturing Co.
It turns out that almost 90% of the most advanced semiconductors are assembled by one company—Taiwan Semiconductor Manufacturing Co.—which makes the island nation a strategically important choke point (it’s already a political one) in the technological Cold War between the U.S. and China. Beijing has deliberately created a chokehold over the production of rare earths used in a wide array of high tech products, and has talked about restricting their export to the U.S.
The Suez Canal blockage, meanwhile, has underscored China’s own vulnerability to maritime node disruptions. As my Bloomberg News colleagues David Fickling and Anjani Trivedi report, China imports amost three-quarters of the oil it consumes, as well as about four-fifths of the iron ore behind its frantic infrastructure buildout.
The insecurity these facts generate is in part driving the nation’s destabilizing efforts to assert control over the South China Sea.
In the latest installment of our Bloomberg New Economy Conversations series this week, we highlighted how there is no future for our planet without the kind of globalized effort that produced breakthrough Covid vaccines. Scientists and researchers all over the world have worked together to develop diagnostics and therapies that will (hopefully) soon return the global economy to something approaching normal.
A smaller, yet similar international effort is underway in the Suez Canal to refloat the Ever Given.
In too many ways, globalization is coming to be defined more by its risks (the choke points) than its benefits (the linkages). Fixing that, as Professor Kobrin argues, will mean finding a better balance between economic independence and integration. The challenge will be to find that harmony without upsetting the project altogether.
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TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
