Lately it seems like we’re all mad for the “local economy.” Farmer’s markets have exploded in recent years in parallel with the “locavore” movement, products are proudly carrying the “Made in the USA” sticker, and even Detroit automakers are getting in on the act with Chrysler’s “Imported from Detroit” ad campaign. The “local economy” is held up as a utopian vision of the future, a cleaner, simpler world that sidesteps many of the more onerous side effects of our relentlessly globalized world. The surprising fact is that this future is closer than we all think — but it’s not because of your local hipster. The shift to more local economies, which may be one of the defining features of the next several decades, is already happening, and it’s being driven more by shifting economic forces than any personal preferences.
It’s no secret that international trade has exploded over the last century. Despite the common complaints of environmental degradation, jobs lost to outsourcing, and deplorable working conditions in developing countries, the globalized system has risen to prominence because it’s better at meeting demand with supply than any other economic system in history. This system has created a world where you can stock up on bananas from Panama, clothing from China, and power tools from Europe, all without ever leaving your home town.
The expansion of international trade has largely been a result of two factors: cheap overseas labor and low oil prices. With negligible oil prices making intercontinental shipping cheap, labor became the defining cost driver for manufacturers. As production processes became standardized and worker skill became less of a factor, it became very cost effective to offshore manufacturing work to countries such as China, Mexico, and the Philippines. In most cases it was cheaper to produce final goods in these locations and ship them thousands of miles back to consumers in the US than to produce them in the US and ship them to local consumers.
Two factors have begun to flip this equation. First, as more and more work has entered emerging economies, followed by more and more money, incomes have predictably risen. This has put upward pressure on wages, which has begun to erode the cost advantages enjoyed by these countries. As these wages have risen, the relative cost of goods produced in these countries has risen, making them less attractive locations for investment.
More damaging to the offshoring business model is the rise in global energy prices. As already stated, the offshoring of manufacturing depends on cheap oil, which results in cheap transportation. As long as oil was cheap enough, it was cost-effective to produce goods offshore and ship them back to the home market. However, the current high price of oil, and the prospect for further price rises in the future, has caused manufacturing companies to reconsider this approach.
The results of this tectonic shift are beginning to be apparent. Last year Ford announced that it would be shifting jobs from China and Mexico back to the US. Caterpillar, another large manufacturer, is paying $120 million to build a plant in Texas to make excavators — most of which it currently produces in Japan. These companies, among others, have decided that the threat of rising oil prices outweighs the promise of lower labor costs. By moving production closer to home, they hope to offset higher labor costs with significantly shorter supply lines, limiting shipping costs.
This shift should be beneficial to the US economy, and should offer many opportunities for both the US and local communities to capture value, should they act proactively. Driven by simple economics, the manufacturing sectors of the US and Western Europe will not recover to their pre-1990 peak; it’s far more likely that places like Mexico, Eastern Europe, and other geographically-proximate but lower cost regions will become regional manufacturing hubs. However, proactive policy steps can ensure that the US captures as much of this shifting productivity as possible.
High-level policy makers have noticed this trend, and are starting to act accordingly. In his recent State of the Union, President Obama called for a wide range of policies to attract manufacturers to the US and create jobs. These included trade enforcement measures, business tax breaks, worker training programs, and increased R&D spending. These policies are certainly positive steps, and will help to attract investment and jobs back to the US.
In the long run, however, these policies may miss the point. Make no mistake — unless we discover a cheap and limitless source of power to replace petroleum, the future of globalization is going to be predominantly local. Over the next several decades markets will look increasingly inwards. It will no longer be possible or cost-effective to mine metals in Africa for shipment to Asia for assembly & delivery to the US or Europe.
This is a shift that is to be welcomed warily. Rising energy prices and increasingly scarce resources certainly threaten our modern lifestyle and consumption patterns. But it may be the case that that the resulting shift to a more local economy limits environmental impacts, creates jobs, and potentially raises standards of living — if it’s handled properly. Any policy response to this shift should aim to mitigate the damage done by higher energy prices while maximizing the benefits of a more local economy and lifestyle.
Due to this shift, we might soon live to see a world where “Made in the USA” is neither stigma nor oddity, but merely a fact of life. Your shirt will be made in Richmond, not Bangalore, and your food will be grown much closer to home. This shift will take decades, but, if things continue on their current path, it is probably inexorable. “Locavore” may soon no longer be a unique label, but an accurate description of our entire society.