The Truth About Globalisation

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What is globalisation?

And do you think it’s really any good?

No, I’m serious. What is it?!

Different people call it different things.

Some might say globalisation is the recent unstoppable force that homogenises business, countries and cultures. Others say it’s the inevitable move towards a smaller, connected world.

China and India are exemplar beneficiaries of globalisation, we’re told.

It was only recently (historically speaking) that they both jumped to centre stage. And it’s thanks to things like opening of trade routes, the internet and other globalisation stuff…right?

What a load of…

Globalisation is a buzz word

Globalisation is not the tide that rises all boats. It’s not making us all the same. It’s not even a recent trend.

Globalisation is a buzz word. It’s filler. Something to explain the rise of nations or talked about unemployment.

While the word popped up in the 1980s, prominent people and associations still use it today to explain and exclaim.

Take a look at what China’s Vice President, Wang Qishan recently advocated for at the World Economic Forum (WEF)…

Economic globalisation is the main trend…We will see challenges and turbulence in the path ahead. But we have to stick to the principle of peaceful development, and not be shaken in pushing ahead with economic globalisation.

Yet the WEF turns around and says globalisation leaves people behind…

Source: World Economic Forum

I mean, these people have no idea.

Whatever globalisation is, it’s insignificant when compared to what’s really important.

Want me to start explaining? OK. I will!

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How do you explain China and India?

A good place to start is with Margaret Lee’s parents.

Cited by Bruce Greenwald in his book, Globalization: The Irrational Fear that Someone in China Will Take Your Job, Margaret’s parents had few luxuries in life.

Like most mainland Chinese, they ate rice almost entirely for every meal. All they could afford was a tiny, unheated, shared apartment.

Even at their wedding in 1968, there were no luxuries like bridal clothes or a picturesque backdrop.

The reception was back at their tiny apartment. And guests had to leave at a reasonable hour, as both of Margaret’s parents had work early the next day.

Both had education levels equivalent to university degrees. Yet that was only enough to secure menial jobs, which barely paid enough.

It was a meagre existence and typical for the time in China.

But fast forward a generation and Margaret’s parents have a completely different life.

They can afford to move into their own place, which has reliable electricity and modern appliances. Healthcare is better and more affordable than it was 30 years ago.

Margaret’s parents can afford to travel. Even Margaret has the opportunity to study an advanced journalism degree in the US.

Most people will hear stories like that and scream, GLOBALISATION!

But was it really globalisation that lifted Margaret’s parents out of poverty within a generation? Was it really global trade, which has always been increasing, that lifted China out of poverty?

No! It was China.

China, not the outside world, has enriched the lives of Margaret’s parents, and lives of millions of Chinese.

One of the biggest factors contributing to that was the relaxation of state control over the economy, Greenwald explains.

They gave the market system a chance. And while it’s not perfect, it incentivises people to invent and produce, as they will be the ones reaping the benefits from their hard work.

The result was a huge increase in economic activity, which then lead to China becoming the dominant exporter they are today.

It’s a similar story for India.

Globalisation is not pushing India to new heights. It’s local policies, a relaxation of regulation and local businesses doing all the hard work.

More evidence of the primacy of local forces in spurring economic growth comes from comparing India and China with countries that have been their peers — impoverished and underdeveloped — only two or three decades ago,’ Greenwald writes.

Consider countries like Argentina, Mexico or Ghana.

If globalisation is the tide that lifts all ships, if it’s global trade that develops the undeveloped, then why are the three countries mentioned above not following China and India upwards?

Is it because they have not adopted a free market system? Is it because there are local differences between countries, and those local differences matter more than global trends?

Yes and yes.

Even between Australia and the US, local conditions explain differences across industries and sectors.

Why, for example, are the largest stocks on our exchange banks and mining stocks, whereas in the US its tech and communication companies?

Well, we have a concentrated banking system to begin with, which also make it profitable and worth paying for from a shareholder perspective. Regulation and consolidation has made it that way over time.

We’re also a country blessed with easily minable resources in plenty.

(Although, gold expert Greg Canavan might tell you it’s a different story for the yellow metal. You can find out more here.)

‘OK,’ you say. ‘Globalisation is not the great tide that lifts all ships, but surely it’s responsible for mass unemployment as jobs move over to low wage countries like China and Vietnam.’

OK, let’s tackle this one, too.

Do we really want all the horrible jobs?

You know the typical story…

Some manufacturer closes its doors, leaving hundreds of workers out of the job because they’re moving operations to China or India or wherever else labour is cheap.

This was the narrative for the Aussie auto manufacturing industry.

Wages are high here. Wages are low in China. So for management, it was a no brainer. If they wanted to compete, they needed to cut costs and ship operations overseas.

Some fear this will happen to wide swaths of the employment landscape.

There are people in places like Asia and Eastern Europe just as smart as you. They too, have university degrees. The only difference is they’re willing to work longer, harder and for less pay.

So unless we have some protective policies, millions could soon be out of the job?

Well, some of the above is true.

There are jobs moving overseas. But this is the minority and they’re jobs we’re all better off without.

Until you stop to think about it, there are a surprising number of jobs that are local by nature. And they’re unlikely to be offshored…ever.

Take building, for example. If you need your house built, then you’re going to employ a local builder, or at least one that operates within the country.

Even if we’re talking pre-fabricated houses, you’re still going to employ people locally to assemble that house.

Medical care is another job not going way. Can we offshore age care workers? Can we offshore nursing? No. All of it has to be done locally. It’s the same for most surgeries and seeing the local GP.

There are a few cases where you hear Australians make the trip to Thailand and come back after having a few procedures done. But this is the tiny minority.

For most surgeries and healthcare, the jobs will be performed locally.

And it’s the same for education. Primary school teachers, educational aids, high school teachers, university professors…they’re all safe.

Even my mother, who runs her own educational consulting business, is at no threat to cheap labour overseas. You know why?

Because parents are not going to send their kids to Shanghai for tutoring. Anyone that wants any decent level of education or university degree in Australia, has it all provided to them within Australia and by Australian workers.

Lawyers, social workers, utilities, telecom installation. All of this stuff can’t be offshored. These are all jobs, which are growing in number and will remain within our borders.

The only few jobs that are leaving are the ones that can be automated. The low wage jobs that are process driven, which don’t have to be performed locally.

Do we really want these jobs?

Consider the American textile mile, Kayser-Roth. 60 years ago, this was a thriving business employing 400 workers.

While the business is gone, and the work has been shipped overseas, there’s now a new manufacturer in its place.

The new business has 90 workers using sophisticated and expensive equipment to extract a liver ailment drug from duckweed.

The lowest paid technician at this new business makes far more than any of the textile worker ever made at Kayser-Roth.

This not only encapsulates the story of American employment, but employment here down under, too.

Low wage manufacturing jobs are going and will soon be completely gone. Even lower wage service jobs are on the way out.

Consider what software is doing to admin and back of office tasks. It’s making low wage labour in that space irrelevant.

Replacing these jobs are already higher paying skilled work, or service jobs, which have dramatically increased our standards of living overtime.

Campaigns to keep low wage manufacturing jobs, and similar easily automatable jobs, is like a campaign to bring back farming, even though you don’t make much money doing it.

Yet even if we kept all these low wage automatable jobs, they’d still be lost to automation and robotics anyway.

Each year, we’re seeing more manufacturing jobs transferring from low wage workers to robot arms and machinery. The same is happening to low wage, easily automatable service jobs like I’ve mentioned above.

Understand that this is a huge threat to countries like China and India.

Why pay a low wage worker $5,000 a year when you can buy a machine for $5,000, run it on autopilot 24/7 and pay just a few hundred bucks on maintenance each year?

Now, take a look at the long-term employment shifts in the US…

Job Category 1970 1983 2005 %Δ (1970-2005)
Managerial, Professional 18,265 23,592 46,278 153.4%
Technical, Sales, Admin 19,732 31,265 39,738 101.4%
Precision Production, Craft, Repair 10,158 12,328 15,325 50.9%
Operators, Fabricators, Labourers, Farmers 20,759 19,791 18,717 -9.8%
Service Occupations 9,712 13,857 21,672 123.1%
Total 78,626 100,833 141,730 80.3%
(in ‘000)        

Source: Globalization: the irrational fear that someone in
China will take your job

More people now have better jobs.

Isn’t that something we want to continue happening?

What it all boils down to

I guess it all boils down to people using the wrong word, or mistaking it for something it’s not.

When someone says: Globalisation is the cause of China’s rise. What they should say is: Productivity and free markets have transformed China into the dominant economy they are today.

When someone else says: Japan’s stagnation is due to globalisation. What they should say is: Japan bet their chips on an unprofitable industry (manufacturing) and have failed to significantly improve productivity since the early 1990s.

A lot of the time when someone says ‘globalisation’, what they actually mean is ‘productivity’.

As Greenwald puts it simply, ‘productivity growth has been the engine pulling the train of humanity out of poverty.

And it’s something that really only happens locally.

It is a local choice to be more productive. The globe doesn’t give you productivity gains for free. In fact, global competitors force you to keep up with their own leaps in productivity.

What does all this mean for a return-hungry investor such as yourself?

How can you use this uncommon knowledge to increase your chances of picking winning investments?

It’s pretty simple, actually…

Look for locally dominant companies that are immune to automation and global competition. That’ll narrow down the list a little (autos: out, apparel: out, home appliances: out).

You also want to look for locally dominant companies that have wonderful management in place. That’s because productivity is largely a managerial choice, rather than something that happens organically.

Chances are, though, if you find a locally dominant company, they’ll already have a great group of managers, hence their locally dominant position.

Lastly, you want to look at locally dominant companies with great management that you think are fairly priced.

This last one is probably the hardest one to stick to. It’s easy to get exciting and overoptimistic, especially when you find a great business with good management.

It’s also worth pointing out that a ‘fair price’ doesn’t necessarily mean a low PE. It means a price which is sensible for the level of growth you believe the company can sustain.

But most of you probably already knew all of this: look for quality companies with quality management at a sensible price.

And that’s the point.

What people call globalisation, has been happening forever. Globalisation is merely global trade, which has always been in the background.

What happens today is people confuse things like global trade with productivity, which has always either been going up, down or sideways.

Maybe the only recent difference in all this has been the rate of change.

Our advances in technology have amplified productivity’s magnitude, where it can now jump leaps and bounds at a moment’s notice.

Today, whole industries can be disrupted in what seems like months, by massive leaps in productivity.

New inventions. Automating processes. It’s all been happening forever. Just now, it feels like the dial has been turned to 11.

So the ‘intellectuals’ decided to mince their words.

Instead of saying productivity is pushing up global trade, they try to cram both into a single word…


But now, you know better.

Your friend,

Harje Ronngard,
Editor, Money Morning

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