(What’s Left of) Our Economy: Globalization and Butter Cookies

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China, consumers, country of origin labels, food, free trade, globalization, Indonesia, Netherlands, Trade, {What's Left of) Our Economy

So there I was sitting on the living room couch watching some TV after the big Thanksgiving meal with my some of my wife’s family, and of course I was eating again – this time some “premium butter cookies” from a big, brightly colored tin container. Why should that be remotely blog-worthy?

Here’s why. If you’re a cookie aficionado like me, when you read terms like “butter cookies” and “big, brightly colored tin container” chances are you think the product comes from Denmark. And in fact, you’d be even more likely to come to that conclusion upon seeing that the brand is “Danisa” and that the cookies come from an “original recipe of Danish Specialty Foods APS.” The cover is topped by a European-type monarch’s crown, too.

Imagine my wife’s surprise, then, when she found out (after she came home with them from the supermarket thinking that they’d be a terrific gift for the relatives of Danish descent we saw today) that they’re a “Product of Indonesia.” And despite my decades of work studying the globalization of production (including food manufacturing) and other economic activity, the cookies’ origins threw me for a loop, too – for two reasons. First, I wasn’t aware that Indonesia was such a center of cookie production excellence. And second, Indonesia (as opposed to other very low-cost countries) might have made some sense had this enormous Asian archipelago country ever been controlled by Denmark. But it wasn’t. Its former colonial masters were the Dutch – who are known for some pretty terrific cookies themselves (but unfortunately were notably cruel imperialists).

Upon further investigation, however, I discovered that Indonesia has formidable cookie-making capabilities. Indeed, although Danish Specialty Foods APS is indeed a Copenhagen-based business whose website says it “specializes in Danish butter cookies and owns the right to the brand, Danisa, worldwide,” it also operates an Indonesian facility owned by PT Mayora Indah Tbk.

That Indonesian food conglomerate says its founder “started baking its first biscuits out of a home kitchen in 1948” and has since “grown to become a recognized global company in the Fast Moving Consumer Goods Industry.” And it’s big into the “biscuit, candy, wafer, chocolate, coffee, instant food, beverage and cereal” spaces.

More surprising still: Indonesia has quite the reputation, at least in Asia, for butter cookies in particular. And I’ve got to tell you – these cookies taste just as good as any I’ve had (most of which I assume have come from Denmark, but now I can’t really be sure).

So maybe the doctrine of comparative advantage – the principal economic theory supposedly explaining the superiority of the freest possible global trade over all other trade alternatives – is at work here after all? I suppose. At the same time, the same discipline of mainstream economics that lauds free trade also holds that economies at all levels work best when consumers have the most information available about the products and services they’re examining.

To be clear, American law requires no country-of-origin labels for processed food products like cookies.  So the two above companies deserve some credit for offering any “Product of Indonesia” identification at all.  At the same time, this label is found on the bottom of the butter cookie tin in type tinier than I’ve ever seen aside from some jewelry inscriptions.

Would my wife have bought the cookies had the brand been “Mayora” rather than “Danisa”? Had the tin cover pictured, say, a Sumatran rhino? Had “Product of Indonesia” been displayed prominently on the lid? Probably not, since she was looking for a gift from Denmark. Might she have picked some up if she just had a hankering for butter cookies, or thought I might? Maybe.

I’m still left

>wondering whether and if so why Denmark itself has lost its butter cookie-making chops – or at least its ability to make the products competitively;

>and thinking that if a company is willing to make a product associated with a country in a country that’s not associated with that country, it shouldn’t make that product’s real origin as inconspicuous as the law allows.

And let’s not forget a final twist to the story: Danish Specialty Foods announced on its website that it was planning to open a factory in China. Of course, it turns out there’s a long butter cookie-making tradition there, too.

Following Up: Foreign Engines of Deflation

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China, Congress, currency, currency wars, deflation, devaluation, Election 2014, emerging markets, Financial Crisis, Following Up, Global Imbalances, India, Indonesia, Japan, Korea, Obama, Republicans, The Economist, Trade, Trans-Pacific Partnership, won

If you think I’m worrying too much about new industrialization drives by India and Indonesia greatly strengthening deflationary forces that could further weaken an already feeble global economy, check out some new information from The Economist. It shows the powerful deflationary effect that’s already been generated by the industrialization of another third world population giant – China.

The magazine’s Buttonwood column reports research findings of a 70 percent correlation between Chinese producer prices and American consumer prices since 1995. That’s when the inevitable production- and job-offshoring effects of Clinton-era decisions to expand U.S.-China trade greatly began to kick in. And the China producer price index has been falling for 30 straight months. That’s the longest such tailspin since the late-1990s, the years of the Asian and third world financial crises.

This powerful relationship between China producer prices and U.S. consumer prices also confirms many other important critiques that have long been made by opponents of U.S. trade policies with China and the rest of the world.

For instance, it makes clear that despite endless claims that China is working hard to turn its economy into one led by domestic demand, it still relies heavily on exports for growth – especially to the United States. In the process, it further debunks the contention that integrating huge so-called emerging markets like China more tightly into the global economy will in the policy-relevant future turn into an unprecedented win-win for the entire world economy.

Trade expansion with these countries – which also included decisions to overlook their currency manipulation and other predatory trade policies – was supposed to create immense new sources of net new global demand that in turn would create equally immense new opportunities for producers and workers in first world countries like the United States to supply these new consumers. But because third world populations still remained way too poor to absorb a critical mass of their own production – much less production from high-income countries on a net basis — the emerging markets became bigger emerging net exporters than ever. Consequently, they drained demand from the world economy and growth from wealthier countries, and especially their workers.

The only way this global economic high wire act could be sustained was to extend unprecedented amounts of credit to consumers in America, in particular (the only economy that kept itself fully open to third world exports). The spending and debt explosion that resulted wound up imploding in 2007 and 2008, and produced the global financial and economic near-collapse whose damaging after-effects are still felt in spades more than half a decade later.

Finally (for now), it’s revealing that Buttonwood noted how these burgeoning deflationary forces are also being strengthened by Japan’s recent decision to speed up the weakening of the yen – which will put renewed pressure on China and other Asian net exporters who compete with Japan to respond in kind. He (she?) could have added that Korea has already let its won hit a nine-month low versus the dollar – and has announced that it’s willing to devalue further or respond otherwise.

The columnist drew the right conclusion: “Small wonder if governments decide it is every man for himself.” I just hope that he (she?) and his (her?) colleagues remember that the next time they’re thinking of writing yet another editorial lambasting even the feeblest trade response by an America better positioned to go it alone than any other economy.

Not that Buttonwood or any other cheerleaders for foolhardy, indiscriminate trade expansion seem to have much to worry about.  With his pursuit of new agreements with Korea and proposed deals like the Trans-Pacific Partnership, Barack Obama has been faithfully following their advice throughout his presidency.   And of course this week’s midterm elections have presented him with eager new Republican partners in Congress.

 

(What’s Left of) Our Economy: Overseas Deflation Threats Over the Horizon

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deflation, economic development, exports, Global Imbalances, globalization, India, Indonesia, industrialization, manufacturing, {What's Left of) Our Economy

Whoever the winners in the midterm elections in the United States, their top challenge would have been the same: strengthening the U.S. recovery and extending its benefits to the vast majority of Americans who have seen their incomes fall even as growth has resumed. One of the main obstacles would have remained the same, too: unusually weak growth in wages and prices, which keeps signaling that the economy’s paramount source of growth – the demand for goods and services – is likely to remain weak, too.

More alarming, the wage and price stagnation could well turn into deflation – a situation of falling wages and prices that tends to worsen and plunge growth itself into a nosedive. Consumers put off purchases in the expectation of better bargains, businesses therefore sell less and less, they hire fewer and fewer (if at all), wages sink further, and a race to the bottom is on.

Deflation of course will need to be fought on the home front. But its deep rooted international roots will need to addressed as well, in particular the impact of literally hundreds of millions of workers from gigantic but very poor developing countries who began flooding world labor markets at the beginning of the 1990s whose capacity to produce was orders of magnitude greater than their capacity to consume.

It’s now become a commonplace that what I once called this worldwide worker explosion – epitomized by the rise of China – has undermined pricing power throughout the world economy, and especially in segments whose output could be readily traded, like manufacturing. Less commonplace, but just as important, is that the persistence and even strengthening of deflation since means that the uber-prediction advanced to sell expanded trade with these countries has so far proven completely bogus. At least in a relative sense, consuming power in the developing world hasn’t grown nearly fast enough to rebalance supply and demand.

In recent weeks, however, some news has emerged indicating that deflationary forces are about to get stronger still. I’m not talking about the worsening of economic stagnation in the European Union – the world’s largest single economic unit. I’m talking about the renewed determination of two other third world population giants – India and Indonesia – to become major manufacturing powers along the lines of China.

I’m actually surprised that it’s taken them this long. But contrary to my expectation – as expressed in my book The Race to the Bottom – Indonesia focused on exploiting its oil and other natural resources. India’s industrialization has famously been slowed by the dreadful state of its infrastructure and its choking bureaucratic red tape and, paradoxically, by its success in computer software and high tech services.

Both countries recently elected new leaders, and both of them have decided that promoting manufacturing can fill crucial national gaps and promote crucial national needs. India has concluded that even the most advanced services sector offers no hope of providing decent employment for the vast majority of its people living on subsistence wages – at best. Indonesia believes that it will never approach first world levels of prosperity by continuing to rely on commodity production.

Unquestionably, industrialization remains the best long term bet for meaningful third world economic progress. Over the shorter term, though – if it works – it could inject a huge new deflationary shock into a world economy at exactly the wrong time.

Consider some of these figures. Indonesia’s population is 250 million. Even after an excellent, commodity-led growth run over the last few years, only 13 million households have annual disposable incomes greater than $10,000. In large measure, the explanation is that, as one analyst puts it, “Compared with other countries in Asia Pacific, Indonesia…has the most attractive hourly wage.” Meaning of course, the lowest wage. India has 1.25 billion people. Its average hourly manufacturing labor cost of 92 cents is just over one-fourth of China’s.

Of course both countries are hoping – and need – to serve export markets, especially in higher income countries, where the world’s critical mass of purchasing power is still found. But both are also hoping to supply their own internal markets from within. So export opportunities for U.S. and other workers from the developed world could be even less lucrative than suggested by these two countries’ low living standards.

As a result, their big-time entry into global manufacturing markets stands to bring not only deflation, but greater international imbalances like those that triggered the financial crisis six years ago. Figuring out how to harmonize worthy and entirely legitimate third world hopes for progress and prosperity on the one hand, and the global financial stability that benefits everyone on the other, is the greatest international economic policy challenge of our time. Is there any reason to think it’s even close to the screen of either the Obama administration or Republican leaders in Congress?