Tuesday, July 17, 2007

Of Globalization and Carpet Merchants in Istanbul

Walking by the endless shops in the touristy SultanAhmet section of Istanbul can be instructive for the ways in which modern global economics works. It certainly opens a window on the methods through which global economic activity can adjust itself to political and violent disruption, especially in the case of trade with Americans.

Step into a carpet store, any carpet store. Over tea, if one identifies oneself as an American one might hear a couple of versions of the same story. Since September 11, 2001 and especially since American military involvement in Iraq, the volume of Americans to Istanbul has dropped dramatically. And that seems to have hurt business. Unlike Europeans, or people form other regions of the world, Americans tend to be free with their money. As one merchant put it--"They take taxis, they have large houses and buy big rugs, they like to decorate, and they are nice." But Americans are wary of coming into an area in which they feel they might be less welcomed. The American global war on terror thus produces a potentially significant effect on the expansion of global trade.

What to do? One solution, of course, is to do nothing. An adjustment of changes in consumer mix might require changes in product mix. Perhaps the carpet merchants will have to sell more smaller and cheaper quality carpets to more parsimonious Europeans and others. In effect effect, globalisation might have to absorb a bit of contraction. And that suggests that a judicious use of terror might be more effectively to disrupt trade rather than to blow up a couple of people. A policy targeting trade and trade flows, can more severely disrupt the current forces of economic expansion free movement (and from the terrorists ideological perspective, Westernization).

But that solution has been largely rejected by our carpet salesmen. Over a second cup of tea two approaches are explained. Both salesmen have refused to abandon the American market Both chose slightly different paths to recovering global trade. In one case, the caret dealer drew on his network of past American customers to develop a system of private sales within the United States. Loaded with samples, he sells his wares at up scale "tupperware parties" where a satisfied customer hosts the dealer, who then shows his wares at gatherings organized by the customer. The customer host gets a discount on his purchases and everyone else can sample the goods in their homes. Sales have increased.

The other dealer chose a different path. He also took his goods to the United States. But rather than work through a network of contacts and private sales he chose to steer some of his goods into the carpet auction market in the U.S. This market is global and well established. See the Jozen website and the O'Connell Guides. And now it is growing as a substitute for direct sales on site. He is also globalizing on a more permanent basis. He went on a fact finding tour of the United States and discovered that his cost of sales (including maintaining a showroom, transportation, taxes, etc.) were lower operating a shop directly in the United States than in Turkey. So he established his brother in a shop in a small but upscale resort. He plans to expand to others. And there is a dividend. As a shop owner in the United States (a small multinational enterprise) he has begun to serve as a distributor for the goods of others from Turkey. These include art pieces and other products that might be shown in his U.S. shops.

Thus, an interesting consequence of the disruptive potential of the war on terrorism. A drop in outbound American consumption has produced a shift to inbound investment in the United States. Global trade has been affected, but not as one might have predicted. And the positive consequences might be quite valuable for the United States, especially as foreign direct investment increases. Our carpet dealers, then, provide us with an interesting window on the complexities and character of economic behavior in a context in which the free movement of capital is privileged.

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