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January 22, 2007
Trade and currencies
Last week in my posting on the Future of Globalization I mentioned the Economist story about the unbundling of work tasks as the new paradigm of trade. I also mentioned that our thinking about economic policy has not caught up with this shift. Friday's New York Times illustrates the point in "Trade Deficit Stubbornly Defies the Dollar’s Slide":
But new factors arising from the increased globalization of production seem to be making the trade adjustment particularly slow. For instance, by moving more production out of Europe, into dollar-pegged regions like China and elsewhere in Asia, European companies have created natural hedges against a strong euro.
“With globalization, we now have a large network of plants all over the world,” said Anton Börner, president of BGA, an association of German wholesalers and exporters based in Berlin. “So we are not as affected by changes in a single currency.”
Hugo Boss, one of Joseph Abboud’s main competitors, is based in the southern German town of Metzingen. But it also stitches garments at a factory in Cleveland and buys raw materials from Asia, where most of its transactions are in dollars or dollar-linked currencies.
Our mental model of what drives trade is still an image of finished goods crossing borders (wine and wool). Currency changes affect that (and therefore may eventually affect some of trade with China). But there is the natural currency hedging that companies have created with their distributed production. And it is often based on dollars anyway.
As bits and pieces of the production process are distributed to different places, currency changes become less effective. So the cost of the Italian designer of your new suit or dress goes up a little, but the production costs in Taiwan stay the same and the transportation costs (based on the cost of oil in dollars) goes down. Currencies still matter. But it may take larger shifts to affect prices and cost, and therefore the location of production.
Just a small example of how the global rules of the game may be shifting.
Posted by Ken Jarboe at January 22, 2007 8:06 AM
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