Tuesday, May 19, 2009

Global Trade and Supply Chains

The process of producing goods and services tends to be longer and more complicated than our students think, and certainly longer than even many adults know. Consequently, it's good to find a short article that illustrates the various stops in a "supply chain", while also providing an excellent example of globalization and interdependence when discussing trade. Yesterday's edition of The Wall Street Journal contained this article (free at time of writing) which can do all of that.

Superficially, the article is about Zoran, a California chip-maker. The firm has to deal with reduced orders in a time of "lean manufacturing" and "just-in-time (JIT)" inventory management. Those concepts, while helpful in helping larger manufacturing firms control costs when properly implemented, can be problematic on the smaller firms farther up the chain.

However, the article contains a graphic titled "Life of a DVD Player “that does an excellent job of connecting the dots that link basic materials to final product made available to the consumer. It shows how such far-flung locales as Minnesota, Japan, China, Taiwan and California are all involved in one component. (That would not be an example of JIT, which was based on fairly close proximity of suppliers.) It can be used to demonstrate how falling consumer demand ripples throughout the world economy for an example of globalization and interdependence. I also like the fact that it can be used to illustrate one of the key problems with trade data - point of origin.

Because markets are multi-layered and interlinked, it is virtually impossible for any nation to track where imported goods actually originate. The easiest way is to ascertain what the last stop was before it got to the final destination. If we use the graphic, chances are the Toshiba DVD player at Best Buy was probably counted as an import from China, even though the nameplate is for a Japanese firm. But one can easily see that is a gross oversimplification. The production of one specific chip involved a number of countries and workers in those countries. Chances are other components, from the case to the wiring, involved numerous others. From that standpoint alone, one should be able to demonstrate that trade barriers can easily have a negative impact on many countries, including the country imposing the barriers.

Another interesting resource is this flash presentation at the YaleGlobal online site. It examines the television industry - not program production but actual manufacturing. It does NOT connect to the 'lean manufacturing' theme of the WSJ article, but still provides an interesting example of globalization over time.

Please share your reaction.
This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
7. Economic thinking is marginal thinking.

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