Sand in the Gears of Globalization.(international flow of trade, capital to slow)(Brief Article)

Globalization is in trouble. One of its key premises--increasingly frictionless cross-border connectivity--is in doubt as the world responds to terrorism. The events of September 11 have imposed the equivalent of a new tax on trade, capital and information flows. National borders will have to be tightened. Cross-border transfers will take longer. Insurance rates on shipping will go up, as will premiums for worker compensation. Morgan Stanley estimates that U.S. commercial insurance premiums could rise from $148 billion in 2000 to the $210 billion-to-$240 billion range in 2002. That would be a sizable dent in the earnings of corporate America, currently about $450 billion for all nonfinancial companies.

The instant transfer of information can no longer be taken for granted, either. The Nimda computer virus that disrupted global networks in September is an example of e-terror, which slaps yet another tax on cross-border connectivity. There are signs that businesses are tilting software budgets increasingly toward disaster-recovery services, security firewalls and antivirus programs, and backup and recovery systems. A Morgan Stanley tally of chief information officers for America's 225 largest technology users found that 34 percent attached the highest priority to computer security in December 2001, up sharply from 16 percent in September.

September 11 has instilled fear about what might come next. To the extent that multinationals have begun to rethink the strategy of outsourcing production to a global network, the risk premium of globalization has just gone up. That undermines the global earnings stream of multinationals, and the disinflation and productivity gains that come from outsourcing. Basic economics says that a tax on cross- border connectivity will undoubtedly reduce international flows. Suddenly, the brave new world looks a lot less frictionless than it did before. There is sand in the gears of global commerce.

The costs of terror are one thing. But globalization now faces challenges from the business cycle, too. The world is in a rare "synchronous recession": all the major economies are stumbling at the same time. This is unusual for three reasons. First, the global economy is more dependent than ever on trade, which now accounts for a 24 percent share of world GDP. That's well in excess of shares prevailing in two earlier synchronous global recessions--17 percent in 1975 and 19 percent in 1982. Second, the world faces the sharpest ever ...