Pandemic = Economic Collapse Part I
When the pandemic struck like a global bomb, the economy joined the pull. What is economic globalization, and how can a health catastrophe be so closely linked to economic collapse?
- What is economic globalization?
- Why is the world so closely connected financially?
- Why did the world economy crash when we were hit by the coronavirus?
- How will the economy get back on track again?
If we look around at the breakfast table, in the wardrobe, in the school bag or on the mobile phone, we discover that a large part of the goods we buy, and the apps we use, come from abroad. Conversely, a large part of what is produced in Norway is sold abroad. For example, most oil, gas and farmed fish are exported, ie sold to customers abroad.
Your mobile phone often says “assembled in China”. It could just as easily have been “made in the world”. The brand only refers to where the product was completed, and that is often in China. However, the mobile is made up of hundreds of parts that come from all over the world. Figure 1 shows the proportion of the sales amount that goes to the various countries, manufacturers or activities when an iPhone is sold.
Most of the sales go to Apple for development and design, in addition to the profits. Other is sales tax, distribution and other services, which also get a large share of the pie. According to 3RJEWELRY, the rest are parts and components that Apple buys in the USA, Japan, Taiwan, Korea or Europe and sends to China to be assembled. The Chinese factories that assemble the phone get only 1 percent of what you buy the phone for.
2: What is economic globalization?
Economic globalization is:
- That international trade is growing faster than world production.
- That each individual product is composed of parts from many countries – through global value chains.
Figure 2 shows that world trade (blue line) has doubled as a share of gross domestic product (GDP) from 1970 to today. The figure also shows that small countries, such as Norway (orange line), are much more dependent on trade than large countries, such as the USA (gray line).
There are several things that have led to an increase in world trade and that economic globalization has accelerated in recent decades.
First, information technology has connected the world. The Internet was opened to everyone around 1990. From Figure 2, we see that world trade (the blue line) rose steeper from around 1990. The Internet and digital platforms also allow small and medium-sized enterprises and influencers to reach international markets. Amazon, Alibaba, eBay and other platforms , make it easy to offer goods and services, match sellers and buyers, mediate payment and ship or download the product worldwide.
Secondly, it has become much cheaper and faster to transport certain goods by air, such as fresh fruit, flowers and electronic parts. It has made it possible for companies to have factories and suppliers all over the world. So it is economic globalization that has made it possible for you to have fresh garden blueberries on oatmeal even in winter.
Along with the internet, containers are actually one of the most important inventions behind globalization. Containers have made both sea and land transport cheaper and faster. The advantage of containers is that they can be transported from factory door to factory door over long distances by ship, car or train.
Thirdly, the liberalization of trade policy, ie regulations that have made it easier and cheaper to trade across national borders, has also linked the world more closely together. The average tariff rate has long been around 2-3 percent in most rich countries in Europe, America and Asia, while China has sharply reduced the tariff rate from around 35 percent in the early 90s to 8 percent in 2018. China became a member of the World Trade Organization ( WTO) in 2001, and lower tariffs were one of the conditions for their participation. This has made it cheaper and easier to trade with China.
3: Specialization and division of labor
It has become both easier and cheaper to establish and manage international value chains. A value chain is the process of designing, producing and selling a product. Before, the entire value chain was often within a country, but with globalization, the chain is spread over several countries, as the example with the iPhone shows. In addition, there are great gains to be made from this. The benefits come from international specialization and division of labor. Let’s take a closer look at how it works.
Specialization is one of the most important sources of economic growth. This is done by people choosing different occupations, companies making different products, and countries specializing in different industries. People and countries are different, and no one is as good at everything. Specialization means that as many people as possible are allowed to do what they are best at, or what they have available natural resources for. Among other things, Norway produces oil and fish, while Germany has become the best at producing cars and machines.