GLOBALIZATION

After centuries of technological progress and advances in international

cooperation, the world is more connected than ever. But how much has the rise of trade
and the modern global economy helped or hurt American businesses, workers, and
consumers? Here is a basic guide to the economic side of this broad and much debated
topic, drawn from current research.

Globalization is the word used to describe the growing interdependence of the

world’s economies, cultures, and populations, brought about by cross-border trade in
goods and services, technology, and flows of investment, people, and information.
Countries have built economic partnerships to facilitate these movements over many
centuries. But the term gained popularity after the Cold War in the early 1990s, as these
cooperative arrangements shaped modern everyday life. This guide uses the term more
narrowly to refer to international trade and some of the investment flows among advanced
economies, mostly focusing on the United States.

The wide-ranging effects of globalization are complex and politically charged. As

with major technological advances, globalization benefits society as a whole, while
harming certain groups. Understanding the relative costs and benefits can pave the way
for alleviating problems while sustaining the wider payoffs.

THE HISTORY OF GLOBALIZATION IS DRIVEN BY TECHNOLOGY,

TRANSPORTATION, AND INTERNATIONAL COOPERATION

Since ancient times, humans have sought distant places to settle, produce, and
exchange goods enabled by improvements in technology and transportation. But not until
the 19th century did global integration take off. Following centuries of European
colonization and trade activity, that first “wave” of globalization was propelled by
steamships, railroads, the telegraph, and other breakthroughs, and also by increasing
economic cooperation among countries. The globalization trend eventually waned and
crashed in the catastrophe of World War I, followed by postwar protectionism, the Great
Depression, and World War II. After World War II in the mid-1940s, the United States led
efforts to revive international trade and investment under negotiated ground rules, starting
a second wave of globalization, which remains ongoing, though buffeted by periodic
downturns and mounting political scrutiny.

EFFECTS OF GLOBALIZATION

1. MORE GOODS AT LOWER PRICES

Globalization encourages each country to specialize in what it produces best using the
least amount of resources, known as comparative advantage. This concept makes
production more efficient, promotes economic growth, and lowers prices of goods and
services, making them more affordable especially for lower-income households.

2. SCALED UP BUSINESSES

Larger markets enable companies to reach more customers and get a higher return on
the fixed costs of doing business, like building factories or conducting research.
Technology firms have taken special advantage of their innovations this way.

3. BETTER QUALITY AND VARIETY

Competition from abroad drives US firms to improve their products. Consumers have
better products and more choices as a result.

4. INNOVATION

Expanded trade spurs the spread of technology, innovation, and the communication of
ideas. The best ideas from market leaders spread more easily.
5. JOB CHURN

Globalization supports new job opportunities but also contributes to job displacement. It
does not significantly change the total number of positions in the economy, as job
numbers are primarily driven by business cycles and Federal Reserve and fiscal policies.
Nevertheless, a Peterson Institute study finds 156,250 US jobs were lost on net each year
between 2001 and 2016 from expanded trade in manufactured goods, which represents
less than 1 percent of the workers laid off in a typical year.1 Low-wage workers in certain
regions are most affected. Many of them also face lower earnings or have dropped out of
the workforce. Bigger factors than trade driving job displacements are labor-saving
technologies, like automated machines and artificial intelligence. Better-paying positions
have opened up in manufactured exports—especially in high-tech areas, such as
computers, chemicals, and transportation equipment—and other high-skill work, notably
in business services, such as finance and real estate

6. DECLINE IN GAP BETWEEN RICH AND POOR GLOBALLY, BUT WIDER

INEQUALITY WITHIN UNITED STATES

Globalization has helped narrow inequality between the poorest and richest people
in the world, with the number living in extreme poverty cut by half since 1990. But within
many countries, including the United States, inequality is rising. A consensus of scholarly
work holds that globalization has contributed marginally to rising US wage inequality,
putting this factor at 10 to 20 percent. A leading explanation for rising US inequality [pdf]
is that technology is reducing demand for certain low- and middle-wage workers and
increasing demand for high-skilled, higher-paid workers. Wages have also stagnated,
though economists are still debating the exact causes. Countries exposed to globalization
have alleviated inequality to different degrees through tax and welfare systems. The
United States has done the least among advanced economies to mobilize government
policies to reduce inequality. In 2016, 19.9 million workers were laid off or discharged
(i.e., involuntary separations).
GLOBALIZATION HAS DISPLACED SOME WORKERS, WHILE SUPPORTING HIGH-
SKILL JOBS

Globalization changes the types of jobs available but has little effect on the overall number
of jobs in the ever-changing US labor market. That being said, some workers have directly
benefited from expanding global commerce, while others have not. Certain manufacturing
and industry workers in specific geographic regions lost out, such as those in furniture,
apparel, steel, auto parts, and electrical equipment industries in Tennessee, Michigan,
and the mid-Atlantic states. A widely cited study [pdf] shows that between 1991 and 2007,
lower-wage manufacturing workers within industries that faced import competition
experienced large and lasting earnings losses, while higher-wage workers in these
industries did not. The lower-wage workers may have lacked the skills and mobility to
transition to other lines of work, whereas higher-wage workers relocated to companies
outside manufacturing. Studies show that globalization has also diminished US worker
bargaining leverage to demand higher wages.

Because US firms often beat international competitors at supplying high-skill services—

like engineering, legal, consulting, research, management, and information technology—
workers in these fields have benefited the most from globalization.

Business-service employment expanded more than 20 percent between 2006 and 2016.
These jobs pay more than 20 percent higher wages than the average manufacturing job.

Foreign-owned companies that do business in the United States have hired Americans
at a faster rate than US private employers between 2007 and 2015. They also pay better,
do more research and development, export more, and invest more than the average US
firm. The same is true, by comparison with local averages, of US firms that invest abroad.
One in five American manufacturing workers is now employed by a foreign-owned
company operating in the United States.

Demand will likely increase for more highly- skilled manufacturing workers, in areas such
as engineering, management, finance, computer and mathematical occupations, and
sales. The greatest areas of job growth now in the United States are in professional and
business services, health care and social assistance, and educational services. More job
training and education is needed to prepare workers for these jobs.

WHY SUPPORT GLOBALIZATION IF IT DISPLACES JOBS?

Economists look at the effects of globalization across the entire economy to weigh the
pros vs. cons. Since the overall payoff is so much greater than the costs to individual
workers or groups who have lost out, nearly all economists support having an open global
market versus closing it off.
Other common arguments:

 Globalization is like technological progress. Both disrupt some livelihoods while

enlarging the economic pie and opening up new and better-paying job
opportunities. The internet, for instance, made many jobs obsolete but also created
new higher-paying jobs and industries unheard of only a few decades ago.
 Protectionism helps select groups but at a higher cost for everyone else. Imposing
tariffs on steel, for instance, helps certain domestic steel producers, but many more
jobs depend on businesses that need some imported steel to make goods that are
affordable. US consumers end up paying more for foreign goods because of the
tariff and more for domestic goods because domestic producers often raise prices
in the absence of foreign competition. Damage worsens when trading partners
retaliate with their own tariffs on US exports. US agriculture is particularly
vulnerable to retaliation.
 One study shows that US tariffs on Chinese tires under President Barack Obama
saved 1,200 tire manufacturing jobs. But US consumers paid $900,000 per job
saved and 3,700 retail jobs were lost as tires became more expensive.
 The United States must keep open markets to stay competitive globally. Other
countries are continuing to open their markets to each other, forming regional
supply chains that make production more efficient and products more affordable
within their trading blocs. By not joining these deals, US exports have a difficult
time competing. US businesses may also opt to move operations abroad to gain
access to foreign markets.
 US real income in 2030 is estimated to be $133 billion less than it would have been
if President Trump had remained in the Trans-Pacific Partnership (TPP) trade deal.
Other countries are proceeding on the deal without the United States, giving them
preferential access to each other’s markets.
 Operating within a rules-based system allows for peaceful conflict resolution.
There are cases when unfair trade practices and abuses harm US producers.
Maintaining international systems to address those problems is key to preventing
mutually destructive trade wars—even real wars. Economic integration
 strengthens US security alliances, while trade wars weaken the ability of the United
States to collaborate with allies.

What Is Globalization?

Globalization is the spread of products, technology, information, and jobs across

national borders and cultures. In economic terms, it describes an interdependence of
nations around the globe fostered through free trade.

On the upside, it can raise the standard of living in poor and less developed
countries by providing job opportunity, modernization, and improved access to goods
and services. On the downside, it can destroy job opportunities in more developed
and high-wage countries as the production of goods moves across borders.

Globalization motives are idealistic, as well as opportunistic, but the development

of a global free market has benefited large corporations based in the Western world.
Its impact remains mixed for workers, cultures, and small businesses around the
globe, in both developed and emerging nations.

Globalization Explained

Corporations gain a competitive advantage on multiple fronts through globalization.

They can reduce operating costs by manufacturing abroad. They can buy raw
materials more cheaply because of the reduction or removal of tariffs. Most of all, they
gain access to millions of new consumers.

Globalization is a social, cultural, political, and legal phenomenon.

 Socially, it leads to greater interaction among various populations.

 Culturally, globalization represents the exchange of ideas, values, and artistic
expression among cultures.
 Globalization also represents a trend toward the development of single world
culture.
 Politically, globalization has shifted attention to intergovernmental organizations
like the United Nations (UN) and the World Trade Organization (WTO).
 Legally, globalization has altered how international law is created and enforced.

KEY TAKEAWAYS

Globalization has sped up to an unprecedented pace since the 1990s, with public
policy changes and communications technology innovations cited as the two main
driving factors.

China and India are among the foremost examples of nations that have benefited from
globalization.

One clear result of globalization is that an economic downturn in one country can
create a domino effect through its trade partners.

The History of Globalization

Globalization is not a new concept. Traders traveled vast distances in ancient times
to buy commodities that were rare and expensive for sale in their homelands. The
Industrial Revolution brought advances in transportation and communication in the
19th century that eased trade across borders.

The think tank, Peterson Institute for International Economics (PIIE), states
globalization stalled after World War I and nations' movements toward protectionism
as they launched import taxes to more closely guard their industries in the aftermath
of the conflict. This trend continued through the Great Depression and World War II
until the U.S. took on an instrumental role in reviving international trade.

Globalization has since sped up to an unprecedented pace, with public policy changes
and communications technology innovations cited as the two main driving factors.

One of the critical steps in the path to globalization came with the North American
Free Trade Agreement (NAFTA), signed in 1993. One of NAFTA's many effects was
to give American auto manufacturers the incentive to relocate a portion of their
manufacturing to Mexico where they could save on the costs of labor. As of February
2019, the NAFTA agreement was due to be terminated, and a new trade agreement
negotiated by the U.S., Mexico, and Canada was pending approval by the U.S.
Congress.

Governments worldwide have integrated a free market economic system through

fiscal policies and trade agreements over the last 20 years. The core of most trade
agreements is the removal or reduction of tariffs.

This evolution of economic systems has increased industrialization and financial

opportunities in many nations. Governments now focus on removing barriers to trade
and promoting international commerce.

Globalization Advantages

Proponents of globalization believe it allows developing countries to catch up to

industrialized nations through increased manufacturing, diversification, economic
expansion, and improvements in standards of living.

Outsourcing by companies brings jobs and technology to developing countries. Trade

initiatives increase cross-border trading by removing supply-side and trade-related
constraints.

Globalization has advanced social justice on an international scale, and advocates

report that it has focused attention on human rights worldwide.
Disadvantages of Globalization

One clear result of globalization is that an economic downturn in one country can
create a domino effect through its trade partners. For example, the 2008 financial
crisis had a severe impact on Portugal, Ireland, Greece, and Spain. All these countries
were members of the European Union, which had to step in to bail out debt-laden
nations, which were thereafter known by the acronym PIGS.

Globalization detractors argue that it has created a concentration of wealth and power
in the hands of a small corporate elite which can gobble up smaller competitors around
the globe.

Globalization has become a polarizing issue in the U.S. with the disappearance of
entire industries to new locations abroad. It's seen as a major factor in the economic
squeeze on the middle class.

For better and worse, globalization has also increased homogenization. Starbucks,
Nike, and Gap Inc. dominate commercial space in many nations. The sheer size and
reach of the U.S. have made the cultural exchange among nations largely a one-sided
affair.

Real World Examples of Globalization

A car manufacturer based in Japan can manufacture auto parts in several developing
countries, ship the parts to another country for assembly, then sell the finished cars to
any nation.

China and India are among the foremost examples of nations that have benefited from
globalization, but there are many smaller players and newer entrants. Indonesia,
Cambodia, and Vietnam are among fast-growing global players in Asia.
Ghana and Ethiopia had the fastest-growing African economies in the world in 2018,
according to a World Bank report. (For related reading, see "What Is the Role of the
Nation-State in Globalization?")

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Globalization is a term used to describe how trade and technology have made the
world into a more connected and interdependent place. Globalization also captures in
its scope the economic and social changes that have come about as a result. It may
be pictured as the threads of an immense spider web formed over millennia, with the
number and reach of these threads increasing over time. People, money, material
goods, ideas, and even disease and devastation have traveled these silken strands,
and have done so in greater numbers and with greater speed than ever in the present
age.

When did globalization begin?

Many scholars say it started with Columbus’s voyage to the New World in 1492.
People traveled to nearby and faraway places well before Columbus’s voyage,
however, exchanging their ideas, products, and customs along the way. The Silk
Road, an ancient network of trade routes across China, Central Asia, and the
Mediterranean used between 50 B.C.E. and 250 C.E. is perhaps the most well-known
early example. As with future globalizing booms, new technologies played a key role
in the Silk Road trade. Advances in metallurgy led to the creation of coins; advances
in transportation led to the building of roads connecting the major empires of the day;
and increased agricultural production meant more food could be trafficked between
locales. Along with Chinese silk, Roman glass, and Arabian spices, ideas such as
Buddhist beliefs and the secrets of paper-making also spread via these tendrils of
trade.

Unquestionably, these types of exchanges were accelerated in the Age of Exploration,

when European explorers seeking new sea routes to the spices and silks of Asia
bumped into the Americas instead. Again, technology played an important role in the
maritime trade routes that flourished between old and newly discovered continents.
New ship designs and the creation of the magnetic compass were key to the explorers’
successes. Trade and idea exchange now extended to a previously unconnected part
of the world, where ships carrying plants, animals, and Spanish silver between the Old
World and the New also carried Christian missionaries.

The web of globalization continued to spin out through the Age of Revolution, when
ideas about liberty, equality, and fraternity spread like fire from America to France to
Latin America and beyond. It rode the waves of industrialization, colonization, and war
through the eighteenth, nineteenth, and twentieth centuries, powered by the invention
of factories, railways, steamboats, cars, and planes.

With the Information Age, globalization went into overdrive. Advances in computer and
communications technology launched a new global era and redefined what it meant
to be “connected.” Modern communications satellites meant the 1964 Summer
Olympics in Tokyo could be watched in the United States for the first time. The World
Wide Web and the Internet allowed someone in Germany to read about a breaking
news story in Bolivia in real time. Someone wishing to travel from Boston,
Massachusetts, to London, England, could do so in hours rather than the week or
more it would have taken a hundred years ago. This digital revolution massively
impacted economies across the world as well: they became more information-based
and more interdependent. In the modern era, economic success or failure at one focal
point of the global web can be felt in every major world economy.

The benefits and disadvantages of globalization are the subject of ongoing debate.
The downside to globalization can be seen in the increased risk for the transmission
of diseases like ebola or severe acute respiratory syndrome (SARS), or in the kind of
environmental harm that scientist Paul R. Furumo has studied in microcosm in palm
oil plantations in the tropics. Globalization has of course led to great good, too. Richer
nations now can—and do—come to the aid of poorer nations in crisis. Increasing
diversity in many countries has meant more opportunity to learn about and celebrate
other cultures. The sense that there is a global village, a worldwide “us,” has emerged.