Globalization involves the international exchange of money, ideas, and culture. But some critics say it adversely affects developed countries like the U.S.
Economists differ in their views about globalization. Some claim that it leads lower opportunity costs, higher growth, and lower market volatility. Others point to lower job growth, costly mismanagement, and stagnant wages.
What Is Globalization?
Globalization is the increase in the global trade of goods, services, and capital. This trade growth has been especially strong between developed countries like the U.S. and emerging markets like China.
There are many factors behind the increase in global trade. European devastation during World War II helped to give America a boost as an industrial power. Lower transportation costs have reduced the costs of trade. Technology has reduced some barriers, while economic policies have lowered others.
Cost reductions have helped accelerate trade. However, the largest driver behind global trade is supply-and-demand economics.
Politicians disagree about globalization. Former U.S. President Donald Trump often took a protectionist stance when it came to free trade under agreements such as the North American Free Trade Agreement (NAFTA). Trump called for higher taxes on imports and fewer multinational trade agreements. He also increased tariffs on foreign goods with the goal of boosting profits for U.S. businesses.
Other presidents, such as Barack Obama and Joe Biden, have taken a more positive view. They favor a balanced approach to securing domestic and global economic interests. President Biden, for example, quickly reinstated the U.S. in the Paris Agreement, a worldwide effort to fight climate change. Biden has also announced plans to rejoin the Trans-Pacific Partnership, a major trade agreement.
While some experts support globalization, others see it as a force that takes away jobs at home.
These conflicting viewpoints have created a spectrum of policies that range from extreme protectionism to complete openness.
What Are the Benefits?
The core benefit of globalization is comparative advantage. This is the ability of one country to produce goods or services at a lower opportunity cost than other countries. Two countries can benefit the most by exporting a good where the comparative advantage exists, but this idea is more complex than it seems on the surface.
For example, let's say a developing country can cheaply produce cement, while the U.S. can more easily produce semiconductors. While the U.S. may be able to make cement more efficiently close to home, it makes more sense to buy it from the other country and focus on semiconductors. This is how globalization drives consumption between nations.
Globalization may also reduce the volatility of output and consumption, since products and services can be imported or exported with greater ease. More elastic production of goods and services means fewer "bubbles" due to a mismatch in supply and demand.
What Are the Drawbacks?
Globalization is often blamed for killing jobs at home. In the cement example, the U.S. cement industry would go out of business if imports from another country were to drive down prices, even if consumption were to increase. Small U.S. cement companies would find it hard to compete. Eventually, they'd shut down, leaving workers unemployed. The larger U.S. cement industry would likely decline, as well.
There is also a high cost of a comparative 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 advantage in manufacturing a wide range of products. Research has also shown that higher-income countries benefit from globalization, while lower-income countries do not.
One final issue is the increase in wages for employees. This is a plus for workers, but it can hurt profits for companies. For example, if a rich country has an advantage in developing software, it may drive up the price of labor of software engineers around the world. This makes it difficult for foreign companies to compete in the market.
The Bottom Line
Globalization is here to stay. It will continue to be a major economic force—and a politically divisive one. Any countries that want to compete and thrive in today's global economy must find a way to balance their own national interests with the broader influences of international trade and cooperation.