It’s the globalized economy, stupid!

In the past few months, there have been multiple instances of toys, pet food and even toothpaste manufactured in China being recalled from stores in the US. In all cases, the reason was the same: higher than permissible levels of lead or other harmful chemical substances.

How will this impact our globally interconnected economy? While the precise impact is hard to establish, it is fair to say that there will be a huge (and adverse) impact. And the impact will be felt by several constituents of our global society.

Clearly, Chinese manufacturers will get hurt because of the recall. Not only will they probably not get paid (or be asked to ship another lot free as compensation), their production schedules will go awry. Inventories will pile up, and offtake will slow down. The employees of the factories that manufacture these products will be unable to pay their workers (as much or on time), leading to a drop in disposable incomes for those families.

America’s busiest shopping season is less than 2 months away, and toys are clearly a huge piece of the holiday shopping. And at a time when the US economy itself is showing signs of weakening and slowing down, demand for lower priced products (i.e. Chinese products) would have been higher. The sub-prime crisis will force lenders to become more stringent about who they lend to; credit will be hard to get- and so more expensive gifts may remain unsold. Again, inventories will pile up, and US retailers will suffer- as will their shareholders. So too will the shareholders (and employees) of the companies that manufacture and export these items- say garment exporters from India, Sri Lanka, the Dominican Republic and so on. In turn, this will impact the GNP growth of these economies, which could well have an effect on exchange rates and local stock markets.

And all this does not even take into account the sadness of the kids (or adults) who did not get the gifts they wanted.

With winter round the corner in the US, demand for oil/gas will be higher. Rising oil/gas prices may fuel inflation- which in turn, will impact exchange rates.

So while there is much to be said about the benefits of globalization, the current scenario is also a grim reminder that there is much about the economics of globalization that we do not know.