The liberal world order and global arbitrage

 

Globalization and the liberal world order can be viewed through the impact of market arbitrage and the law of one price. In a globalized world based on free trade, higher prices in one country will be offset by importing to increase supply and take advantage of any price discrepancy. For commodities, there will likely be one world price after accounting for transportation costs, tariffs, and processing. In the case of energy, oil or natural gas will converge to one price. Of course, this may not fully represent reality, but it is an ideal which is a driving force behind market behavior.

The law of one price can be applied to capital and labor. There will be winners and losers as market equilibrate to one price, but uncertainty is reduced. Investment decisions can be based on the law of one price. Access to commodities will be at the world price so considerations for plant location will be based on labor costs and nearness to the consumers. The law of one price will increase economic efficiency.

In a world where it is more difficult to achieve a world price for commodities, trade and manufacturing will have to be reconfigured. If there is a breakdown in trade as well as the free flow of labor and capital, market inefficiencies will arise, and optimal global growth will not be achieved. Those without access to supply will see growth languish as resources are squandered to support an inefficient world.

Equity and bond markets will not be integrated and return dispersion will increase and correlation across markets will decline. Holding international portfolios will become riskier at the same time diversification will increase. There will be winners who exploit inefficiencies, but consumers will be net losers. Country and regional assessments will need to be improved because declining integration create structures to deal with supply shortages. Finance and investing will be harder with a greater focus on local market dynamics. We have not seen this type of disorder in decades and it represents a headwind that reduces consumer welfare.