The World Is Shrinking

"Globalism began as a vision of a world with free trade, shared prosperity and open borders.  These are good, even noble things to aim for." - Deepak Chopra

While the global economy is still trying to recover from the Great Recession global trade is surging.  In 2012 world goods exports surged to just over $16 trillion from $12.5 trillion in 2009.  It is interesting that this surge in trade is coming on the back of weak global economic expansion but when you look at some of the reasons behind the growth it appears that this trend will continue unabated for the foreseeable future making the world seem to be shrinking.

Basic economic theory states that goods and services will migrate to a country that has a comparative advantage over other countries.  Comparative advantage refers to a country's ability to produce goods or services at a lower opportunity cost than another country.  This means that even if one country can produce all goods and services at a lower cost than every other country, there is still an opportunity to increase profits by focusing on the goods and services that reduce the overall opportunity cost.  So let's assume country A can produce every good and service cheaper than everyone else.  Country B however is able to produce certain goods that have a low opportunity cost in country A cheaper (in opportunity cost measures) than country A.  Therefore country A stops producing that good and imports this from country B.  There is a benefit to both countries in doing this as their overall profit increases.

So let's explore opportunity cost.  This is the cost of doing something at the expense of not doing something else.  Take for example work versus play.  At any given time in the day you could walk out of your office and go for a surf.  Now while you are surfing you are not making any money so the opportunity cost is relatively high.  That said if you value your free time more than the amount of money you would make during that hour surf session then it would be wise to go surfing.  Now to take this one step further it may be that there are no waves that day in which case you would stay at work as suddenly the opportunity cost is higher at work than surfing.  So you can see that opportunity costs can vary over time depending on circumstances.  This is why countries can have an opportunity cost in one product for a while and then lose it a few years later for the simple reason that international trade shifts all the time.

Looking at how this landscape has changed over the years it is easy to see not only technology at work by also economies of scale.  Technology is making it easier and easier to transact globally.  It is relatively simple to wire money across borders, find a manufacturer in a foreign country and fly there and back for a small fee.  Furthermore shipping costs are falling and with things like three dimensional printing a product can be designed on the fly, the specifications emailed across the globe in seconds and a week later the product is being shipped back to your home port.

Economies of scale are also helping drive the costs down and this too sets the stage for growth in international trade.  Architects in London are used to design buildings in Australia and the main infrastructure of the building is made in Indonesia with parts shipped from China.  These parts are then shipped from Indonesia to Australia where they are assembled much like Lego blocks with the finishing touches done by Australian artisans.  The only way that this can be done in a cost effective manner is if each part of the equation is cheaper than doing it in the home country.  Looking more carefully at this example the cost of the building is mainly made up of parts and labor.  Parts are far cheaper in China and labor costs only $7 a day in Indonesia.  So all that is left is to make sure that the shipping costs do not blow the budget.

To this end Maersk is building 20 Triple-E container ships.  These behemoths are as long as the Empire State building and can house 18,000 containers, enough to ship 182 million i-Pads in one go.  The ship itself weighs 55,000 tons.  One link in the anchor chain weighs 500 pounds.  If you stacked the containers end to end they would stretch over 68 miles.  Fuel one way from Rotterdam to Shanghai costs around $2.5 million.  The bet of course is on the continued growth of global trade but as amazing at is first appears it also is driving down the cost shipping.  The reason of course is the economies of scale.  Back in 1956 to ship one ton of freight across the Atlantic was $5.83.  Using container ships drove this down to 15.8 cents per ton.  Using the Triple - E will drive these costs even lower and that is the benefit of economies of scale.

Interestingly the boat is being built in South Korea with parts shipped in from around the globe and assembled on the docks.  It is clear that with the continued advances in technology combined with economies of scale and comparative advantage, global trade will continue to flourish.  This should be seen as a positive as it will draw the global closer together and should foster better relations between countries.  The one fly in the ointment would be war and while one can never count this out unless Syria sparks an international divide, for the foreseeable future global trade should continue to flourish.