Sunday, March 22, 2015

Globalization & Protectionism

The development of the global economy is perhaps one of the most controversial topics in economics, while also the most inevitable. Very few economists would argue that resisting
globalization is a wise idea, or even possible. However, there are definite advantages and disadvantages to a global economy. This blog simply weighs the positives and negatives of how globalization has impacted the United States and the international market as a whole in regards to specialization of economies, protectionism, and international trade.  
 The American system was designed around an understanding of the free market – where supply
and demand determine the prices of various good and services. This allows scarce resources to flow to their most efficient uses, since capitalist producers will not continue to waste valuable resources on failed experiments, if there is no economic incentive. As competition increases due to more countries and businesses having interaction with each other – the international consumers will have a greater quality and quantity of product.

Gas lines resulting from OPEC Embargo, 1973
There are a number of factors that impact the degree to which developing nations are capable of competing with more prosperous nations. First, some countries simply maintain an absolute advantage in a particular sector of the economy. An absolute advantage is when, “one country, for any of a number of reasons, can produce some things cheaper or better than another” (Sowell, p. 503, Basic Economics: A Common Sense Guide to the Economy). Whether this advantage comes from climate, technology, or even the culture of society – it can cause other nations to become incapable of competing in that sector. Comparative advantage is where specialization in national economies allows countries to divide their resources to produce the most efficient amount of goods, despite possible absolute advantages exercised by one country over another. This can allow for massive increases in productivity – but it also has the potential for abuse by one country toward another. In 1973, due to the comparative advantage that Saudi Arabia and OPEC held over the oil industry, Arabs “imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war negotiations” (“Oil Embargo” Office of the Historian). The globalization of the economy, then, can have both positive and negative consequences on the growth of national wealth. 

One of the biggest problems with specialization resulting from globalization is that countries can reduce or even eliminate entire sectors of their economy – for example, the US now imports most factory-made goods from overseas in China or Taiwan – countries that have specialized to focus on industrialization. This makes for cheaper products, but costs the US blue-collar factory jobs. When workers lack expertise outside of a particular sector, job losses in factories can destroy their livelihood and lead to vast homelessness in certain communities.

It must be understood, though, that this does not mean that the entire economy suffers, as a result. If blue-collar jobs are lost to overseas corporations – it will usually result in more white-collar jobs domestically. Thus, an economy might experience rapid growth, through specialization, while still seeing entire sectors lost and radical increases in unemployment rates. At this point, however, labor unions historically will arise to protect the rights of workers to have full employment. If a large enough union can mobilize a grassroots campaign against the government of a nation, it can easily prevent the export of economic sectors, causing entire sectors to be “protected” from outsourcing. This is known as protectionism – and it results in a country favoring domestically produced goods and services – often going so far as to place tariffs and quotas on foreign imports.

It is fair to note that protectionist policies are effective at accomplishing their chief objective – they artificially preserve the jobs they seek to protect, and insulate these workers from potential job loss. This can benefit a country domestically, as issues of joblessness and homelessness are not as rampant, despite changing technology. However, protectionist policies have the unintended consequence of harming foreign nations, by blocking or limiting the amount of goods and services that these countries can export. Organizations like the World Trade Organization exist to address the rules of international trade, and to ensure that protectionist policies remain limited, to avoid unnecessary disputes between nations. The area where protectionist policies become the most problematic is in regard to the commanding heights of the economy – large industries like coal, oil, and steel.

Finally, the globalization has had a profound impact on the development of international trade agreements. As the global market has expanded to allow more rapid trade and more international business, many nations have sought to establish freer trade agreements with each other, in the interest of bilateral economic growth. One key example of this is the formation of the North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada. This agreement “reduced barriers to commerce and business among the three nations (Weidenbaum, p. 193, Business and Government in the Global Marketplace). NAFTA was viewed by Canada and Mexico as a great achievement toward more equitable trade between themselves and the United States. When NAFTA was under debate in the United States, many conservative politicians objected to the adoption of the agreement due to potential harm to the economic stability of the U.S. economy, by allowing lower skill jobs to transition toward Mexico and forcing unionize labor to suffer. While ultimately, politicians voted in support of NAFTA, in light of recent developments, the success of this agreement is questionable. As Weidenbaum points out, “Overall, the changes resulting from more open trade are turning out to be much less than forecast by either NAFTA’s supporters or opponents” (193). Thus, even with strides being taken toward freer trade, the globalization of the market still creates difficulties for successful trade between developing nations and more prosperous countries.  

In conclusion, the globalization of the market is essentially a neutral phenomenon. There are both negative and positive consequences – but it is an inevitable result of free market capitalism. While there are certainly potential complications, through protectionist and punitive trade policies, as well as unbalanced trade between nations, there are many advantages as well. It is important to understand that, whatever fears or dreams that economists may express in regard to globalization, it has certainly benefited economic and human rights advances in developing nations. It is vital that politicians – and the general public – understand the essentials of the global market – and ensure a healthy respect and fear for the potential consequences of manipulation of the markets by national or international government agencies.

- Evan Gillespie
Copyright April 2014

1 comment:

  1. I'm gathering that it would be a negative for the world if any nation instituted large trade restrictions. Is that correct? If so, the U.S. has some sanctions on others it needs to remove.