A Primer on Globalzation
By Keith Maskus '76
Globalization is one of the transcendent economic and political forces of our time. Whether watching in dismay as factory jobs move overseas, savoring the joys of fine imported wines, or reflecting with relief that foreign investors are willing to finance the American budget and trade deficits, we are continually reminded that economies are becoming increasingly more interdependent. American well-being is far more dependent on the state of the international economy than it was 20 years ago.
The word “globalization” has as many definitions as there are thoughtful observers. To international economists like me, it refers to the increasing integration of international markets stemming from technological change, reductions in transport costs and declining government barriers to trade and investment. While this definition is disarmingly simple, the processes of globalization are complex, multi-faceted and powerful.
To gain a better understanding, it is useful to break down globalization into its sources, channels and effects. Its main source in recent decades has been the dramatic pace of technological changes. These changes primarily include improvements in information technologies, reductions in shipping costs, adoption of “just-in-time” inventory management and flexible production methods. Consider the impact of having a powerful desktop computer, for example. A talented architect can sit in a condo in San Diego and use computerized drafting programs to develop blueprints for buildings or production plants around the world.
A second source of globalization is declining barriers to international commercial transactions. We are familiar with the reductions in tariffs and removal of import quotas associated with international trade agreements, such as the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA). Under terms of such agreements, formal barriers to trade in the rich countries have virtually disappeared. At the same time, countries have become increasingly open to flows of capital by liberalizing their financial markets and ending restrictions on the ability of multinational firms to invest locally. Perhaps the most significant change of all is the recent tendency of major developing countries to liberalize their restraints on trade and capital flows. It is not news that there are large numbers of capable workers in China, India, Brazil, Mexico and Vietnam. The novelty is that these countries -- and many others -- are now open for business on a global scale.
Consider next the channels through which globalization operates. International trade in goods and services is the obvious form. Imports bring lower prices and greater varieties. Also critical is the flow of direct investment capital through multinational firms. These firms exist largely because they have a superior technology, brand name or management skills that permit them to succeed on a global scale. Such firms are a major conduit through which technology and information are traded across borders, a primary reason that many developing economies are becoming more productive.
Outsourcing is a particular form of this adjustment. The term refers to the decisions of firms to shift some of their activities to unrelated enterprises, which may be domestic or foreign. In the United States, domestic outsourcing is far more common than foreign outsourcing. Nevertheless, the latter activity is more evident in media accounts, with jobs transferred in many industries, ranging from footwear and electronics assembly to call centers and basic software programming. We have not seen the end of this process, as the more routine aspects of numerous activities may be done abroad and shipped back electronically. Consider tax preparation, X-ray diagnostics and distance teaching, for example -- all will be more prominently provided abroad in the future.
What are the consequences of globalization? Although many and complex, they can be summarized as follows. When markets become more integrated, goods, capital and information will flow from where they are cheap and abundant to where they are expensive and scarce. The United States imports toys and apparel for this reason, just as we export grain, machinery and technology. In the process, globalization reduces prices where they are high and raises them where they are low. Clothing prices are far lower in the United States because of imports than they would be otherwise, while the returns to investing in new technologies are higher because of the opportunity to export them. To economists, this competition is efficient and beneficial. By relocating production to places in which particular goods are made most cheaply, all economies become more productive and prosperous overall.
While this sounds great, it comes at a cost. Specifically, anyone who produces goods, provides labor or owns land that has to compete with similar items that are cheaper abroad, will suffer a reduced income due to the implicit arbitrage. Workers in the textile sector of the United States, for example, are marginally more productive than workers in China but earn far-higher wages. On a per-unit basis, it is much cheaper to make underwear in China and Bangladesh than in South Carolina. Globalization will drive U.S. apparel workers to accept lower real wages or get laid off. Similarly, workers in standardized manufacturing sectors are under continual pressure in this country. At the same time, trade and investment favor those who export to world markets.
Put simply, globalization raises incomes and productivity in the aggregate, even as it creates winners and losers. The U.S. experience since 1980 has been a steady tendency toward higher real incomes for skilled individuals and stagnant real wages for the low-skilled. Indeed, it is estimated that in 1980 a person with a four-year college degree could expect to earn perhaps 15 percent more than a high-school graduate. That difference has mounted to perhaps 40 percent today. It is no wonder that engineers are “sexy” in our economy.
What path might globalization take over the next generation? With the emergence of China, India, Brazil and other economies as major exporters, it seems likely that other developing countries will open their economies and attempt to link themselves more closely to integrated international markets. The United States and the European Union continue to push for regional free trade agreements, such as the impending Free Trade Agreement of the Americas, while global negotiations at the WTO are ongoing to achieve more reductions in trade and investment barriers. These issues suggest that further integration is inevitable.
We should not be so certain, however. The wave of economic globalization that we are witnessing today, while powerful and comprehensive, has not yet reached the scale of market integration reached in the late 19th and early 20th centuries. In that “great wave,” international labor migration and capital flows were considerably larger as a percentage of Gross National Product in the countries involved, as capital and workers flowed from the “Old World” of Europe to the “New World” of America, Australia and Argentina. However, this openness and growth came to a grinding halt in the 1930s, as countries restricted immigration and trade. International economists consider the extremely high tariffs enacted by the United States and other countries in 1930 to be a primary source of the Great Depression.
There are echoes of this history in current calls for restraining outsourcing, raising import barriers and reducing immigration. However much these ideas may appeal to common sense or be beneficial to certain workers and towns in the short run, a significant return to protectionism would spell trouble for the world economy.
Keith E. Maskus ’76 is professor and chair of economics at the University of Colorado-Boulder. He is a research fellow at the Institute for International Economics and serves as a consultant for the World Bank, the United Nations Conference on Trade and Development and the World Health Organization. He has been a lead economist in the Development Research Group at the World Bank, a visiting senior economist at the U.S. Department of State, and a visiting professor at the University of Adelaide. He is the author of Intellectual Property Rights in the Global Economy and the editor of The World Economy: The Americas.
Suggestions for Further Reading
- Globalization, Growth and Poverty: Building an Inclusive World Economy. World Bank Publications. 2001.
- Globalization and Its Outcomes . Edited by John O’Loughlin, Lynn Staeheli and Edward Greenberg. The Guilford Press. 2004.
- Has Globalization Gone Too Far? By Dani Rodrik. Institute for International Economics. 1997.
- The Lexus and the Olive Tree: Understanding Globalization. By Thomas Friedman. Anchor Books. 2000.