All right, so we've got this trading system. Why is it risky? Where are the sources of this risk? And let's talk about that. We've got a much more complex system because of these global value chains. It's no longer as simple as a single binary relationship. Now, a good that's flowing into the United States might be flowing from Britain but some process of it begins in Germany. Or Japan might be making something with China which then it starts selling to the United States. In a sense, the number of links, the number of nodes is pretty much the same after 1960. Relatively, almost everybody has achieved independence, certainly by 1965, most of the countries of the world. So it's not that the nodes are increasing but the various position of the nodes and the links between the nodes have become more, more, and more complex. Now, some are not moving up that ladder. They're stuck either with primary commodities, okay, or they're stuck with low-tech and cheap labor. So this is one classic, in a sense, dead end in globalization. That all you merely do is take things from the soil, or stuff that's grown from the soil, and you sell it to the rest of the world. One step up in levels of sophistication is, yeah, you don't do anything very elaborate, but you put it together using cheap labor. And you don't want to be stuck in either one of these positions because of what we saw with the global value chain. There's also risk in this chain, that's obvious. Individuals and companies have become increasingly interconnected and reliant upon— So this is just an illustration of a value chain for a laptop. You've got raw material suppliers over here, which then go to suppliers' suppliers, okay. These are subcontractors. They're making some part that is leading to the next highest. Then it comes together. Then it has to go—and all the way through, for end customer. So crude oil, you export crude oil. And maybe you use that oil to create plastic granulate, okay, in one country, which then goes to produce the keyboard in another country, which then gets sent to the assembly of the laptop. Now you go to a computer wholesaler that's selling these laptops. It's going to a computer store and it's going to a laptop customer. And each one of these could be a separate country. And inside each one of these, there could be various countries. And so you start seeing again the inherent complexity and interdependence. And I hope you also understand the fragility, and this is far simpler than actually it is. Even with something like this, there are risks. Moreover, structure and dynamics allow for contagion, where cascading domino effects can lead to shortages. Let's just go back here. All of a sudden, a shortage in one of these parts means that these parts can no longer function. Or in the case of 2020, for example, what happened with toilet paper, what happened with certain consumption items. That the absence of of a previous stage then leads to a shortage, and that leads to further contagions. And again, you can just imagine, contagion in one product leading to increased demand for another product, which then leads to the supply running out, which then leads to increased demand for yet a third possible substitute, and on and on and on and on. And what you can end up with is with these empty shelves. Now, not everybody is facing the same empty shelves, okay? There's different risks for different people. There is the risk for the rich and the poor. There's risk for the north and the south. And basically, the north associated with the rich, the poor associated with the south. There's supply risk. Change in the source (the node) of your imports or the link is threatened. Okay? So in a sense this is supply risk that you can't get something that you need, either for an intermediate product or for a final product. This can lead to consumption loss. And all of this can be simply inconvenient. I have here, "what, no French Brie??!!" Imagine that as a crisis. Or you can't get various forms of sparkling wines. It can be catastrophic consumption loss. Try buying a mask in March of 2020. Where to go into the store where you could buy masks, you needed a mask, and you get into these catch-22 situations. It can lead to a production loss, okay? Because you're not getting the supply that you need, you can't produce it, and again, this could lead to a cascade or a contagion. And depending on where you are in this, it's very, very different if you're at the end of a supply crisis and all you have to deal with is you have to now drink domestic sparkling wine or eat domestic Brie as opposed to some imported good. It can also mean your basic food supply— as food supply have become more global and very few countries are autarchic, or self-sufficient in food supplies, these supply changes can really affect you and put you in disasters. There's also a demand risk, a change in the destination, or the node, of your exports. And let me give you an illustration of this, this is a sugar cane field. I'm Cuban, so I'm fond of this in some ways. Think about what's happened to the world's taste for sugar. If you were producing sugar in 1940s or 1950s, it was considered a major commodity. No longer, because there are many sugar substitutes and we are consuming less amount of sugar. So there's going to be a change in the destination because people don't want your product so much anymore. So you cannot sell what you previously grew or made, or you cannot make what you cannot sell. So the risks can be from both the supply side and the demand side. Changing tastes, changing preferences, changing design features, that can be disastrous for any particular country. So, for example, let me give you— this is sort of associated with sugar. Those of you who are old enough to remember New Coke, and the flavor of New Coke, which Coca-Cola began. Well, there was a change in some of the secret formula for New Coke, which meant that some spices and some ingredients were no longer as needed, or were no longer needed. This would be a catastrophe for the countries that specialize in those sub-ingredients of the secret formula. So you can be in danger because you're not getting what you need, or you can be in danger because nobody needs what you have to sell. Then we go back to the problem of logistics. As we've made the system more efficient, as we've made the system more optimal for things like just-in-time production. Well, what you can end up with is an empty warehouse. And that's partly the point. You don't want to be spending all your rare capital on storing these goods in a useless way. But what if the ship doesn't arrive? What if the plane doesn't land? Okay? It's very efficient, but it's fragile. And that might cut off—and we've seen this time and time again, where all of a sudden, the stop of a particular input, sometimes important, sometimes not, without that particular input, production must stop because there isn't a warehouse full of that particular product. We also have technology. Those of you, again, of a certain age might recognize HAL from 2001. And we now live with a high level of automation. We do live inside this black box. And very much like the astronauts in 2001, we are subject to whatever this AI, whatever HAL wants us. If HAL misinterprets the mission, if HAL sees the mission as something different, we're going to get different kinds of relationship with that technology. And we have no choice but to trust the technology. And it is impossible to verify that this technology is trustworthy. And I want you to think about that as a dilemma. We have to rely on a part that we might not understand and that we might not be able to fix. Very much like those two astronauts caught trying to plot against HAL while HAL listens to them and then decides that he's not going to go along with it. We've got sources of risk from socio-political systems. Again, we go back to this map that I've used a couple of times of these chokepoints. All of these areas do have some kind of political instability. Let's just say the Strait of Malacca, and the possibilities of some kind of strife occurring in this part of the world. The Straits of Hormuz, the exit from the Suez Canal, which went around the horn of Africa. The increase of piracy, mostly from Somalia. The increase of piracy meant that this particular chokepoint, leaving the Suez Canal, was in danger. Again, the Panama Canal. Any one of these—the Bosporus. Any one of these, we rely, in a sense, on the most fragile sociopolitical system. Because, again, globalization exists on a real surface, on a real infrastructure. And where that infrastructure is is sensitive to very specific sociopolitical problems and sociopolitical challenges. And then we have the environmental damage and the environmental danger. Global supply chains depend on predictability and certainty, okay? I want to know that the widget is coming from this country every single day. I need to know that I can plan my production based on this input coming in. Moreover, I have designed a whole system, at a great deal of expense, so it is designed to transport, to manufacture this subproduct from country A to country B, all right? Now, think about if some environmental change occurs. Let me give you a few illustrations. There was—and I'm sorry, I simply cannot pronounce Icelandic. There was—I'd like to call it the unpronounceable with all due apologies to Icelandic audience—volcano in 2010. Because of the volcanic ash, the North Atlantic air route or air highway was disrupted. This didn't just mean that you couldn't get from one country to the other as a tourist or you couldn't get back. It also meant that that those particular goods that were transported by air couldn't go to their destination. Or Fukushima, there were several really important factories around Fukushima and their outputs could not be accessed, or they couldn't be made for a few weeks because of the Fukushima disaster. The floods in Bangkok, for example, reduced the production of key IT components. Or, as we will see later on, as global climate becomes less predictable— and this is a key thing about global climate change. It's not just the direction of the change but simply the size of the change and the rapidity of that change. As some of these ports think about the increase in the water level, that doesn't just mean a disaster for your beach house, it also means a possible disaster for these ports that have been built with a lot of money. And all of a sudden these ports may be drowned, or these ports may no longer be accessible because of storms, et cetera. So all these—this efficiency, again, that we've gained through the construction of global supply chains are susceptible to these environmental damages. And finally, we also have susceptibility to financial disruptions. And now we're going to go to talk about financial systems and the risk that's involved in these. Because remember, these trade systems depend on this flow of finance. In order to get that good, you have to get that investment money in, you have to get the assurances of payment, et cetera. How are financial systems potentially risky?
