The Benefits of Globalization & Free Trade

The trend of globalization and trade liberalization has been an extremely contentious issue for many. Politicians decry unemployment caused by Benedict Arnold CEOs shipping jobs overseas; labor leaders and environmentalists fear a degrading of worker rights and deterioration of the environment; workers worry that they will lose good paying jobs to cheap foreign labor. From a macroeconomic perspective it is necessary to examine these issues based upon what economic theory predicts and what the empirical evidence demonstrates. While globalization has many connotations, for the purposes of this discussion, it is the process of greater integration of economic activity between nations through free trade and foreign investment by multinational corporations.

First it is important to understand why globalization might be desirable. The fundamental benefits of trade can be demonstrated by applying the economic principle of comparative advantage. The ramifications of globalization in terms of the amount and quality of employment will then be addressed, as well as the contentions that multinationals are exploiting workers and engaging in a “race to the bottom” in labor and environmental standards through there foreign investment decisions.

The economic principle of comparative advantage is crucial in understanding the benefits of free trade and globalization. The concept of comparative advantage states that even if country A can produce two goods more efficiently than country B, if country B can produce one good more efficiently relative to the other good than country A, then it benefits both countries to specialize and produce the good that they have the comparative advantage in producing. Consequently, by trading, both will be better off than if they attempted to be self-sufficient. For example, suppose China can produce computer programs with 30 hours of work and shoes with 15 hours of work, and the U.S. can produce programs with 15 hours of work and shoes with 10 hours of work. The U.S. is more efficient at both, but China has a comparative advantage in producing shoes because they can make them in half the time it takes to make programs as opposed to 2/3 for the U.S.; China’s opportunity cost of making shoes is lower. Without trade, if China has 3000 hours of labor, they could make 80 shoes and 60 programs; the U.S. with 2400 hours of labor could make 114 shoes and 84 programs. Producing in closed economies would result in a total of 194 shoes and 144 programs. If trade is introduced, and the U.S. made all programs and China made all shoes, there would be 200 shoes and 160 programs. Thus, the standard of living in the world is increased with no additional work.

Many are concerned, however, that globalization and free trade are detrimental to the US economy, claiming it lowers our standard of living and causes fewer and lower paying jobs. There is no shortage of outcry that cheaper imports such as textiles from Indonesia or appliances and other manufactures from China are causing a destruction of U.S. jobs and leading to a decline in the economic prospects of the U.S.

This can be addressed looking at both economic theory and empirical evidence. The profound macroeconomic misconception of such critics is that there is a finite number of jobs, and thus a loss of particular manufacturing jobs must lead to greater overall unemployment and economic misery. If one were to follow such reasoning, it would anticipate that the advances in technology that allowed for dramatically fewer workers to be needed to produce the agriculture necessary to supply the nation would lead to the massive proportion of the population that previously worked in farming to be idle and unemployed. Such reasoning would also predict that the millions of clerical workers whose jobs have become obsolete due to computerization would be left permanently jobless. In terms of the employment outlook for an economy, there is no fundamental difference between a job lost in TV manufacture due to more efficient technology and the same job lost due to cheaper overseas labor. The fear of the loss of manufacturing jobs (which can be equated to the fear of losing farming jobs) is based on the fallacy that there will not be any work left to be done. The economic theory that has been borne out in history, however, is that the number of jobs in the economy is a function of the size of the labor force, not the amount of work needed to be done. This relationship is illustrated in the following chart that plots employment along with the size of the labor force (Lindsey 2).

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Though trade, like technological advance, does not affect overall employment, it does affect the composition of jobs in the economy. It tends to shift jobs away from low paying jobs that can be done overseas to high paying jobs