The Pros and Cons of Globalization for Developed Countries
Globalization brings people and businesses together through the international exchange of money, ideas, and culture. However, some critics say it adversely affects developed countries.
Opinions exist on both sides of the globalization debate. Proponents claim lower opportunity costs, positive growth, and reduced market volatility. At the same time, opponents decry the reduction of domestic job growth, the cost of mismanagement to countries and the world, and the stagnation of wages.
What Is Globalization?
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, such as China.
There are many factors behind the increase in global trade. European devastation during and after World War II helped to jumpstart America as an industrial superpower and exporter. Lower transportation costs have reduced the costs of trade, technologies have eliminated some barriers altogether, and liberal economic policies have helped lower political barriers to trade.
While cost reductions have helped accelerate trade, the largest driver behind global trade is supply-and-demand economics and the desire to increase consumption on the part of both importers and exporters.
Conflicting Globalization Views
Globalization is a subject of much political disagreement. U.S. President Donald Trump, for example, was quite vocal about his views of globalization and often took a protectionist stance when it came to free trade under agreements such as the North American Free Trade Agreement (NAFTA), calling for higher taxes on imports and fewer multinational trade agreements. He also increased tariffs on foreign goods to discourage their importation and use.
Other presidents, such as Barack Obama and Joe Biden, have taken a generally more positive view of globalization, favoring a balanced approach to securing domestic and international economic interests. President Biden, for example, was quick to reinstate the U.S. in the Paris agreement—a global effort to fight climate change—and to open the door to the possibility of rejoining the Trans-Pacific Partnership, a major multilateral trade agreement began under Obama but abandoned by Trump.
No matter how quick economists are to extol the universal benefits of globalization, some politicians and other economists see 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 to complete openness.
Benefits of Globalization
The core benefit of globalization lies in 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 the 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 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 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, it may drive up the price of software engineers around the world, which makes it difficult for foreign companies to compete in the market.
The Bottom Line
In many ways, the realities of globalization are here to stay. It will undoubtedly 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.