Globalization in the Era of Amazon.com

Western capitalists have always had a love/hate relationship with globalization.  When they are exploiting resources in under-developed markets they love it. When capitalists in those markets produce finished goods that are very competitive and sell across borders they hate it. 

Trade routes have been “global” going back into antiquity. They existed and flourished because goods that a merchant could bring back to his home market that were scarce or novel would often sell at a premium.  From the beginning global trade epitomized the capitalist mantra: “buy low, sell high”. 

Carrying gold to far away markets or bringing goods home always entailed a certain amount of risk. Over the centuries commercial banks evolved to handle long distance payment processing. Insurance syndicates evolved to assume the risk of loss during transport.

With every cargo container that is off-loaded in any port, there is a need to settle the bill for those goods.  There is today, a large, interconnected global system of cross-border finance that perpetually creates accounts and instruments that need to be funded and then funds them.  

The international network of commercial and investment banks provide the capital needed for commerce and trade. They do so by identifying, quantifying and syndicating risks. The investors who are ultimately providing the funding for all of these transactions want to eliminate as many risks as they can and be well compensated for the risks that they take. 

Vast sums are continually transferred globally from computer to computer to computer, instantly converting Dollars to Euros to Yen. Information about changing exchange rates and other market information is published constantly and available to all instantaneously. This inexpensive infrastructure allows new capitalists to enter the market.  

Globalization in the last 40 years has moved manufacturing jobs to places where the labor is cheap. Millions of employees in the US and other Western capitalist countries have lost their jobs because of this. Millions of people elsewhere have been raised out of poverty in the past few decades because they will work for a few dollars per day and that is enough to sustain their families. 

In our modern, manufacturing era globalization will always be about cheaper labor, cheaper overhead and cheaper taxes.  When a manufacturer in the Rust Belt packs up and begins to manufacture in Mexico or the Philippines it is about the bottom line and little else. The capitalist view will always be to lower costs, increase margins and provide more profits for the shareholders.

Global shipping has never been quicker, safer or cheaper.  The development of overnight package delivery in the 1970s enabled the “make it here, sell it there” economy to become dominant. The factory to consumer supply chain has never been more efficient than it is today. 

We live in a truly global marketplace.  People all over the world, can and do, directly communicate with each other.  Social media has reduced the cost of global advertising and made it available to even the smallest businesses everywhere. 

A great many of the goods bought by US consumers are manufactured elsewhere. Consumers often do not know where the goods they purchase are manufactured and rarely care.  American consumers should want to purchase whatever they need at the best price possible and indeed most strive to do so.   

Global advertising is cheap; global shipping is cheap and efficient.  Economics teaches that all of this efficiency should bring prices down.  So why aren’t goods sold on-line to US consumers much cheaper?  How much should a US based on-line retailer be able to mark-up the price of goods manufactured elsewhere? 

Let’s assume that a pair of woman’s shoes is manufactured in a country where labor, materials and overhead are cheap. The manufacturer is focused on manufacturing shoes for export to the US for sale to US consumers. This particular pair of shoes is sold by the manufacturer for $15 which includes the manufacturer’s profit. 

In the traditional pricing model, the $15 cost would be marked-up several times by two or three layers of middlemen, aggregators and handlers.  Using “keystone” pricing the retailer might buy the shoes at wholesale price of $40 and sell them to the public for $80. The gross profit covered the retailer’s cost of rent, overhead and employees at its storefront.

Amazon eliminates all that brick and motor expense.  Consequently, people expect to pay less on Amazon than comparable goods at the mall.  But how much less should they pay?  Amazon passes some of that saving on to the consumers in the form of lower prices but not all of it, which is why Amazon makes so much money. 

As the internet makes it easier and easier to purchase goods sourced in other countries and have those goods delivered to your home in the US, the increased competition for each purchase should also drive prices down further. We may be at the cusp of a truly global retail market, the ramifications of which may be disruptive in ways some people will find to be disturbing.

The shoe manufacturer was content with a $15 sales price because it was profitable.  Assume that Amazon is selling the shoes for $55 (30% less than retail at the mall.) The manufacturer can use the internet to sell the same shoes, “factory direct to consumers” in the US for a retail price of $30 where Amazon cannot compete.   

Each unit will be generating substantially more profit to the manufacturer than before. The significantly lower price should result in the sale of many more units. You do not need to be an economist or MBA to see where that is likely to lead.  

That same manufacturer can also aggregate with other manufacturers and offer a website similar to Amazon.  The site might aggregate 10’s of thousands of SKUs of goods that are the same or similar to those already being sold on Amazon.

The logistics are the same. The goods will go to distribution centers in the US where they will be sorted, stored and shipped to consumers.  It is a model Amazon perfected that others can and will adopt. 

Consumers will browse the website, pay by credit card and the goods will be delivered the next day.  These are the same goods from the same factories at much less than the Amazon price because the company infrastructure runs at a fraction of the US cost and because the middleman mark-ups have been eliminated. 

If there are dozens of these cut-rate Amazons available to consumers, they will compare prices and buy some items at one site and some at other sites.  Inevitably, there will be an app that will compare the prices for you, put the best price on top and allow you to buy it with the same click of the button.    Therefore, instead of a delivery from Amazon you might get deliveries from several sites.

As this marketplace develops and other manufacturers and product aggregators compete with Amazon, the price US consumers pay for these goods should come down substantially. This should be good news for US consumers, but perhaps not.

The lower prices and convenience of home delivery offered by Amazon has begun the slow death knell of the local malls and main street storefronts. The exponential growth in online shopping spurred by the cut-rate competitors in the market should hasten the end of brick and mortar retail altogether.  That will put a lot of people out of work.  

Amazon is located in Seattle and employs over 600,000 people, most of who are in the US. Most of those salaries and operational expenses are spent in the US.  If the next generation of Amazon’s competitors operates from Manila, Mumbai or Capetown,that giant sucking sound that you hear will be trillions of dollars leaving the US economy.

I noted in an article I wrote a few weeks back http://laweconomicscapital.com/2019/05/the-job-market-at-mid-century/that new technology is often deflationary because it brings efficiency that lowers costs.  Amazon will fill its warehouses with robots and its trucks will deliver parcels without drivers. Many companies will follow suit.

Tens of millions of jobs will be lost to robotics at the same time globalization will move a lot more jobs out of the US. The salaries earned in other countries represent a lot of the money that US consumers would have spent if they had earned it. This confluence of two broad and sweeping deflationary trends is already evident and potentially very disruptive.

It means that if you buy a home today it may be worth a lot less in 30 years. It means that if you own a shopping mall, it will probably go bankrupt as many already have done. It means that debtors (including the US government) will be paying off their debts with dollars that are more valuable and harder to acquire than the ones they borrowed. It means that the price of gold should be substantially less than it is today.  All of these will disrupt the lives and businesses of a great many people.

At its core, globalization is about competition. All capitalists know that competition is part of the game that keeps everyone on their toes.  Competition and globalization have winners and losers and it is only the losers who hate them.