Globalization: Good or Bad for Developed Countries?

A Look at a Controversial Trend at the Heart of Politics

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Globalization is the increasing interaction of people and organizations through the international exchange of money, ideas, and culture. Many politicians demonize globalization as a force that takes away domestic jobs, while economists are quick to extoll the universal benefits of globalization. These conflicting viewpoints have created a maelstrom of opinions and policies across developed countries that range from extreme protectionism through trade barriers to complete openness.

What is Globalization?

Globalization is often portrayed as the shipping of jobs overseas and/or the importing of products from other countries, but these are merely the side-effects of globalization.

The term globalization can be generally defined as the process of international integration arising from the interchange of world views, products, ideas, and culture. 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 global trade is supply-demand economics and the desire to increase consumption on the part of both importers and exporters.

Benefits of Globalization

The core benefit of globalization is 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 deeper.

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

Drawbacks of Globalization

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 go out of business, 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 wage for workers, which can hurt the profitability of some companies.

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.

Considerations for Investors

Globalization has a tremendous impact on international investors, particularly when it comes to trade issues that may impact a country's exposure to globalization.

President Donald Trump, for example, has taken a protectionist stance when it comes to free trade under agreements like NAFTA. The elimination of these trade agreements could have an adverse impact on economic growth over the long-term since it eliminates comparative advantages.

Changes to trade policies can also have an impact on individual sectors. For example, the U.S. solar industry has long had a tenuous relationship with China's solar industry. The U.S. has accused China of 'dumping' photovoltaic solar panels at unfair prices into the U.S., which could lead the U.S. to take action and introduce import tariffs that could affect the entire solar industry.

International investors should be cognizant of these globalization-related factors and political risks when making investment decisions.