Globalization: Its Effects and Consequences

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Globalization is the expansion of trade networks to include the entire world. It also refers to the marketing of products to distant customer bases and the use of an increasingly extensive and sophisticated transportation infrastructure, which makes such marketing feasible. It can be said that this is the era of globalization, but in point of fact, the phenomenon of globalization is thousands of years old.

The ancient Phoenicians, followed by the Greeks, Romans, and other mercantile societies, engaged in “global” trade in that they traded with the entire known world. One of the reasons that trade was so successful in the ancient world is that there were no barriers to it. The arduous nature and time-consuming process of sending and returning with goods from distant lands was amply repaid by handsome profits. These societies understood the benefits of trade on a fundamental level: that a given people(s) made some things better, cheaper, etc. than others. Conversely, the traders that perceived this would also simultaneously realize that their own nation made something else better than anyone else, resulting in a merchantable surplus. The benefits of such exchanges were so obvious that ancient leaders did little to interfere with trade other than, of course, to tax it.

Interestingly enough, this basic understanding withered away as the Western world began to explore and colonize the globe. Rather than trade with a weaker nation, the preferred strategy was to invade it, enslave or slaughter its inhabitants, and then loot its resources. Imperialist nations such as Spain and England found, to their dismay, that killing 95% of a nation’s inhabitants seriously weakened that nation’s ability to produce the trade goods that the aggressor nation craved. Significantly, it was the smaller European nations, such as Holland and Portugal, that thrived during this era, possibly because lacking the population and resources to field conquering armies, they were forced to trade rather than conquer. The realization that “when goods cross borders, armies do not” helped to cool down regional warfare, which in Europe, was a near-permanent condition in the seventeenth century.

The next round of trade-stifling actions was the “protection” of domestic markets by nations imposing trade barriers such as tariffs and export restrictions. The intent was to shield domestic producers from foreign competition, but the effect was to reduce prosperity all around. Adam Smith exposed the fallacy of trade protectionism with his “Law of Comparative Advantage,” which in its simplest form states that everyone—or every nation—should do what they do best, and rather than producing other goods, they should produce those goods which are their specialty and then trade the surplus for those other goods. For example, Nation A and Nation B both make computers and grow bananas. Nation A makes computers better (i.e., greater output for a given cost) than it grows bananas. Nation B grows bananas better than it makes computers. So far, so good. But Nation A makes computers and grows bananas better than Nation B. The intuitive course—taken by many nations in the 18th and 19th centuries—is for the Nation A’s not to trade at all with the Nation B’s. But this is flawed thinking. Nation A does better to buy Nation B’s bananas with its computers than to grow its own bananas, even if it can grow bananas more cheaply than Nation B. The somewhat counterintuitive nature of this conclusion means that protectionism and trade barriers still exist today.

Of course, there are perfectly rational reasons for a nation to want to “protect” its domestic markets, even if doing so amounts to shooting oneself in the foot. Japan’s present-day forbidding of imports of rice and automobiles is a good example. The US can produce many times Japan’s rice output for far less cost, meaning that the Japanese consumer could enjoy greatly discounted prices for rice if trade barriers were lowered. But Japan’s leaders worry about international tensions leading to a collapse in trade, after which its truncated rice-growing ability (from relying on overseas sources for its rice) would possibly lead to starvation in the country.

What this means in terms of present-day globalization, then, is that the less international tensions exist, the more that nations will be willing to engage in trade. The danger of specialization, which goes hand-in-hand with comparative advantage, is that if one’s trade links are broken, critical shortages in vital commodities could occur very rapidly. This is one reason why so many nations, particularly those without domestic petroleum supplies, are scrambling to find alternative energy sources—there is too great a possibility that trade links with the Middle East could be broken due to religious warfare breaking out in the region.

The driving forces of globalization are technology, specifically in communications. There has been a qualitative and quantitative increase in global communications, which has led to the expansion of markets and the free flow of credit. This has led to a growing pressure to drop trade barriers and facilitate trade, shown in such large-scale recent partnerships as the EU and NAFTA. There is also the realization, in a world where international tensions have abated somewhat but are by no means absent, that “when goods cross borders, armies do not.” Thus, engaging in trade is a way to enhance national security. To cite one present-day example, China and the US are certain to clash in the near future as each nation turns to the western Pacific as its expanded sphere of influence, but these clashes are far more likely to be diplomatic more than military as long as each nation is the other’s primary trading partner.

For firms wishing to compete, it is essential that they have a global outlook. The increased scope and depth of markets mean that a business needs to expand its market reach to remain competitive. A firm content with its robust domestic market will wake up one day and find that its market share is eroding due to competition from eight thousand miles away.

The strongest argument for globalization, then, is that it enhances trade opportunities and ultimately enhances the wealth of all, due to comparative advantage. The strongest argument against globalization is that specialization is hazardous in an uncertain and dangerous world. Therefore, those nations whose prosperity depends on free global trade—such as the US and China—have the greatest obligation to keep the world stable and at peace.