Globalization: Good or Bad for Developed Countries?

How Politics Drives This Debate

The impact of globalization on developing nations is undeniable.
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Globalization brings people and businesses together through the international exchange of money, ideas, and culture, yet some critics say it adversely affects developed countries. U.S. President Donald Trump, for example, has been very vocal on his views of globalization and has taken a protectionist stance when it comes to free trade under agreements like NAFTA, calling for higher taxes on imports and fewer multinational trade agreements.

No matter how much economists are quick to extol the universal benefits of globalization, some politicians demonize globalization as a force that takes away domestic jobs. These conflicting viewpoints have created a maelstrom of opinions and policies across developed countries that range from extreme protectionism through trade barriers, like President Trump's example, to complete openness.

From an economic standpoint, globalization is typically defined as the increase in the global trade of goods, services, capital, and technology. This growth in trade has been especially acute between developed countries like the United States and emerging markets, like China.

There are many factors behind the increase in global trade. Lower transportation costs have reduced the costs of trade, technologies have eliminated some barriers altogether, and liberal economic policies have helped lower the political barriers to trade. While cost reductions have helped accelerate trade, the largest driver behind the global trade is supply-demand economics and the desire to increase consumption on the part of both importers and exporters.

Benefits

The core benefit of globalization is the comparative advantage—that is, the ability of one country to produce goods or services at a lower opportunity cost than other countries. While the idea seems simple on the surface, it quickly becomes counterintuitive when examined more deeply. The theory suggests that two countries capable of producing two commodities at different costs can benefit the most by exporting the good where the comparative advantage exists.

For example, a developing country may have a comparative advantage in producing cement, and the United States may have a comparative advantage in producing semiconductors. While the U.S. may be able to produce cement more efficiently than the developing country, the U.S. would still be better off focusing on semiconductors because of its comparative advantage. This is why globalization is powerful as a driver of global consumption between countries of all capabilities.

Empirical evidence suggests that a positive growth effect takes place in countries that are sufficiently rich when it comes to globalization. For investors and economies, globalization also provides the opportunity to reduce volatility of output and consumption, since products and services can be imported or exported with greater ease. Fewer "bubbles" arise from a mismatch in supply and demand if the production of goods and services is more elastic.

Drawbacks

Globalization is often criticized for taking away jobs from domestic companies and workers. After all, the U.S. cement industry will go out of business if imports from a developing country drive down prices, even if consumption increases. Small U.S. cement companies would find it difficult to compete and likely shut down, leaving workers unemployed, while the larger U.S. cement industry would likely experience a significant protracted decline.

A second criticism is the high cost of a comparative or absolute advantage to a country’s own well-being if mismanaged. For example, China has become a leading worldwide emitter of carbon dioxide thanks to its comparative advantage in manufacturing a wide range of products. Other countries may have a comparative advantage in mining certain natural resources—such as crude oil—and mishandle the revenue generated from those activities.

A final disadvantage of globalization is the increase in wages for workers, which can hurt corporate profitability. For example, if a rich country has a high comparative advantage in developing software, they may drive up the price of software engineers around the world, which makes it difficult for foreign companies to compete in the market.