The global economy’s absorption of the Taiwanese earthquake

Barry Lynn’s controversial view of the global supply chain:

“The hyperspecialized and hyper-rigid production system that is emerging is, if we are honest, the natural outcome of what happens when globalization and outsourcing are combined with an entire lack of regulation by governments,” writes Lynn. “When the borders of the nation and the borders of the firm are both simultaneously ripped open, the result, in industry after industry, is a chain reaction that results very quickly in a single highly networked and highly specialized system of production.”

In Lynn’s view, being highly networked and specialized creates dangerous new vulnerabilities. As an example of what can go wrong, Lynn cites an earthquake that occurred in Taiwan in September 1999. Taiwan is the world’s No. 1 source of made-to-order advanced semiconductors — the microchips that are the brains of iPods, DVD players, computer graphics cards, cellphones and countless other electronic devices. Although the handful of factories that manufacture such chips were not seriously damaged by the quake, power and transportation systems in Taiwan were severely disrupted for a week. The ripple effect of that turned out to be an economic tsunami of sorts for the global high-tech economy.

Shortly after the Taiwan earthquake, some observers feared a global economic crash was beginning. That didn’t happen. But a key lesson should have been learned. There was no backup plan. There were no other factories that could produce those chips, in the short term. A bigger earthquake, one that might reduce to rubble the science park where Taiwan’s top chip plants are located, could have had devastating consequences.

Tuesday’s test of his theory:

An earthquake in southern Taiwan on Tuesday night damaged an undersea optic cable, causing serious disruptions to international phone lines and Internet connections in Korea, Taiwan, China, Japan and Southeast Asia…

Taiwan was the worst affected. Chunghwa Telecom said 60 percent of the phone lines to the U.S. were cut off and 98 percent of communication linking Taiwan with Malaysia and Singapore suffered disruptions. The company forecast it will take two to three weeks for the nation to completely repair the damaged cables. The earthquake also disrupted 1,400 phone lines and 84 international phone lines of Japanese telecom firm NTT, making it impossible to call Southeast Asia from Japan.

The outcome in India:

India’s software and BPO industries recovered some of their connectivity to the US and Europe after undersea fibre optic providers offered an alternative to the Pacific route, which was disrupted due to a quake on Tuesday… Several IT and BPO companies faced a disruption in operations. However, they did not experience a breakdown since they have roped in multiple bandwidth providers and built up a redundancy in operations for such an eventuality. TCS could not confirm that it faced any downtime for any of its operations.

China:

Telecommunications disruptions caused by Tuesday’s earthquake in south Taiwan have stopped foreign trade companies along coastal areas in the Chinese mainland in their tracks. Though the Ministry of Information Industry have taken measures and tried to repair the broken-down, the international access on the internet are still jammed.

Elsewhere:

Companies in the region for the most part said they found ways to work around Tuesday’s earthquake. Among the best off were companies that buy service from telecom carriers with redundant cables or backup satellite systems for these types of disasters. Stock markets were unfazed: In Tokyo, the Nikkei 225 Stock Average closed up 0.31% at 17,223.15 points, while Hong Kong’s Hang Seng Index rose 2.1% to 19,725.73, a record high…

[S]ome businesses found themselves out of touch with critical operations and customers. For example, Hong Kong-based Kingstar Shipping, which manages 10 ships around the region, was unable to reach clients in Japan or Korea and some in Singapore, according to KL Tam, managing director. “We have been trying other ways to communicate — but nothing much works,” he said. Most of Kingstar’s ships today have cargo now, but “if this continued for several days, our operations overseas would essentially stop,” he said…

Executives at some telecom companies say yesterday’s problems indicated they may need to beef up their backup systems even more. “Our plan had been in place for a long time,” said Maki Sato, a KDDI spokeswoman. “But we are now studying whether it should be strengthened.”

The global economy has the ability to absorb mild-sized hiccups to such a degree that the costly creation of global redundancy may not be necessary [a position analogous to this book’s case against overreaction in the security arena]. That’s Chunghwa Telecom Co’s position. But a truly devastating scenario may be reasonably imagined. I expect to see more cost-benefit analysis on this topic soon.

Update: Two weeks later, how is the recovery?

The latest in trade lobbying

FT:

US manufacturers are stepping up lobbying efforts in Washington over imperilled trade deals they see as vital to growth next year… Industry lobbyists have been drawing on contingency funds and the time of top management to try to win votes once the trade deals are sent to Congress by President George W. Bush… So far lobbyists see no movement on the sticking point between Democrats in Congress and the Bush administration over the trade pacts.

Africa "needs a temporary advantage over Asia"

In the FT, Paul Collier advocates trade preferences for African manufactures:

Africa faces three distinctive economic problems, each amenable to a distinct policy. The first is that the region has failed to diversify into labour-intensive manufactures. Although some countries cannot hope to break into global markets – the landlocked, the resource-rich and the failing states – others, such as Kenya, Ghana and Senegal, are well suited for manufactured exports. Unfortunately, in the 1980s when Asia first penetrated these global markets, coastal Africa was mired in poor governance and conflict. Africa’s belated improvements have come too late: the region has missed the globalisation boat. Asian cities now have massive agglomeration economies. African exports need to be pump-primed over the entry threshold constituted by these competing agglomerations and this needs a temporary advantage over Asia in markets of the Organisation for Economic Co-operation and Development…

Africa needs pan-OECD temporary preferential access for its labor-intensive manufactures, combining the best of EBA and Agoa. Such trade policy has the potential to create millions of jobs in Africa.

Africa “needs a temporary advantage over Asia”

In the FT, Paul Collier advocates trade preferences for African manufactures:

Africa faces three distinctive economic problems, each amenable to a distinct policy. The first is that the region has failed to diversify into labour-intensive manufactures. Although some countries cannot hope to break into global markets – the landlocked, the resource-rich and the failing states – others, such as Kenya, Ghana and Senegal, are well suited for manufactured exports. Unfortunately, in the 1980s when Asia first penetrated these global markets, coastal Africa was mired in poor governance and conflict. Africa’s belated improvements have come too late: the region has missed the globalisation boat. Asian cities now have massive agglomeration economies. African exports need to be pump-primed over the entry threshold constituted by these competing agglomerations and this needs a temporary advantage over Asia in markets of the Organisation for Economic Co-operation and Development…

Africa needs pan-OECD temporary preferential access for its labor-intensive manufactures, combining the best of EBA and Agoa. Such trade policy has the potential to create millions of jobs in Africa.

The coming end of sugar protectionism?

US sugar may finally face import competition in 2008:

NAFTA will allow Mexican sugar to enter the U.S. market without restrictions in 2008. Sugar producers have been trying – unsuccessfully – to amend or delay the expiration of the transitional mechanism. “In any case, the legislators who write the 2007 farm bill will not be able to craft a sugar title without taking post-2008 Mexican access into account,” says the Sweetener Users’ Randy Green.

Buy American… Because It Matters!

The backpage of my local newspaper’s sports section had a half-page color advertisement titled:
GM vs. IMPORTS: ‘BUY AMERICAN… BECAUSE IT MATTERS!’

*Why should you buy new American cars, particularly GM, versus the imports?

1. GM’s quality is as good as or better than the imports

2. GM’s gas mileage is better

3. GM’s dependability is better

4. You will help lower our trade deficit

5. You will help keep more jobs in America

6. Profits from new American vehicles will help provide more services for American Citizens and help keep America strong.

7. To the best of our knowledge all of these statements are still factual and if not we apologize for any discrepancies.

8. Because it matters!

Buy a GM car or truck, today. Help support Americans.. BECAUSE IT MATTERS.

Is this type of advertising an indicator of (a) rising protectionist sentiments, (b) increasing desperation on the part of US manufacturers, or (c) my failure to notice it previously?

Genetic distance and development

Discussion of a recent paper by Enrico Spolaore and Romain Wacziarg:

Wacziarg’s most recent work relates genetic distance between populations to differences in economic outcomes, such as their income per capita, to better understand the process by which innovations diffuse from one culture to the next. He found that countries whose populations are the most remote genetically from the populations that developed major innovations over the past 200 years are the least well off. While geographical remoteness also plays a role, it is genetic distance that most strongly correlates with how rich or poor a nation will be. The research also suggests that the main way genetic distance hinders the diffusion of development is by creating cultural barriers. The greater the genetic distance, the greater the cultural barriers are to the flow of ideas and technologies…

Genetic distance is therefore a good indicator of how long ago two groups went their separate ways. “Greater time apart corresponds with greater cultural differences between these groups also, because they’ve had a longer period in which to develop different languages, customs, norms, and habits,” Wacziarg says…

Wacziarg is adamant, however, that such findings do not mean that certain groups are more genetically prone to wealth or poverty. “We’re not looking at what kind of genes are involved, we’re just looking at genetic distance between groups,” says Wacziarg, who has conducted one study on the diffusion of development with Enrico Spolaore of Tufts University. “There have been tremendous reversals in fortune over time. A thousand years ago the richest countries were China and India. Europe was a mess—in the middle of the Dark Ages. If there were something genetic about being European that made you rich, one would suspect it would have made you rich consistently throughout time.”

The relationship between genetic distance and economic status is a function of the closeness of a given group to the locus of an innovation or new invention—something he discerned by comparing the wealth of various groups in different time periods. “Europe in the 19th century benefited economically from developments that led to the Industrial Revolution, for example,” he says. “People in China, say, who didn’t have the same language, norms, habits, and values, took 150 years to start benefiting from those developments. They were physically and culturally far from the invention.”

Hat tip to Pienso.

EU opposes climate change CVDs

Joe Stiglitz’s suggestion that countervailing duties apply to exports from countries not participating in the Kyoto protocol has been rejected by Peter Mandelson:

The European Union’s trade commissioner will on Monday dismiss French proposals for a “green” tax on goods from countries that have not ratified the Kyoto treaty as not only a probable breach of trade rules but also “not good politics”…

“Not participating in the Kyoto process is not illegal. Nor is it a subsidy under WTO rules,” Mr Mandelson will warn in a podcast speech to 50,000 subscribers. “How would we choose what goods to target? China has ratified Kyoto but has no Kyoto targets because of its developing country status. The US has not ratified but states like California have ambitious climate change policies.”

Above all, he says, it would undermine the international co-operation required to combat climate change…

Mr Mandelson backs a plan, to be unveiled this week, to include in the EU’s carbon emissions trading scheme all airlines landing or taking off in the EU, even though it is likely to antagonise the US and Asian countries.

Mr Mandelson, who favours a positive rather than punitive approach, is also writing to Pascal Lamy, WTO director-general, to suggest talks on scrapping tariffs on renewable energy and clean power generation equipment worldwide.

The D-word Round

Andrew Leonard finds more reasons to think the DDA’s stall will last quite a while:

Buried at the very end of a Wall Street Journal article on the possibility that the U.S. might lead a new effort to restart the stalled Doha trade talks comes a tidbit too revealing to pass up.

The administration’s fresh focus on Doha hasn’t necessarily won the same level of attention from its chief executive. Joining visiting South African President Mbeki in the Oval Office Friday, President Bush told reporters that the two talked about “the necessity of trade.”

“We talked about, interestingly enough, the Darfur round,” Mr. Bush said, apparently confusing the Qatar city with the Sudanese region beset by violence.

Sure, sure, anyone can make an honest mistake. Why pick on the poor man, who clearly has much more important things to worry about than getting the details right about trade and genocide. Doha, Darfur — it’s a lot to ask, keeping these strangely named foreign cities straight. But it’s impossible to resist the feeling that Bush just doesn’t give a damn.