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Globalization and the Benefits of Trade by Dr Trade Basics January 2019 Why Trade? Globalization and the benefits of trade By Dr. Robert L. Thompson Since the conclusion of World War II in 1945, optics capacity among countries during the dot- international trade has been greatly facilitated by com boom in the 1990s also contributed to agreement among trading countries on a set of today’s historically low prices of international rules for international trade, known as the telecommunications. General Agreement on Tariffs and Trade (GATT). These rules were developed through a At the end of World War II, most countries series of eight “rounds” of international trade imposed barriers to free movement of capital negotiations between 1947 and 1994. Through across their international borders. These these negotiations, export subsidies were banned barriers, which have been largely eliminated on everything but agricultural products and among high-income countries, have also been import tariffs on manufactured goods were significantly lowered in middle-income countries. reduced to inconsequential levels. As a result, Billions of dollars of funds can move trade in manufactured goods grew rapidly, instantaneously among countries at the touch of a achieving an unprecedented level of specialization computer key. and exchange among countries. These lessons in opening markets, improvements Technology has also contributed to globalization.1 in technology, and the movement of capital have Developments in ocean shipping, such as larger illustrated the benefits of globalization and and faster vessels and containerization of cargoes, international trade – sustainable economic further facilitated globalization. These development, poverty reduction, and rising developments, combined with state-of-the-art standards of living globally. logistics, have significantly lowered the cost of international transactions. Multinational firms Why trade? now engage in just-in-time sourcing through Why do countries engage in international trade global supply chains. Deregulation and increasing anyway? The United States, for instance, engages competition further reduced costs of in trade to obtain goods and services that other international transportation and countries can produce at relatively lower cost telecommunications. Overbuilding of fiber than we can, in exchange for goods and services FARM FOUNDATION 1301 W. 22ND STREET, SUITE 906, OAK BROOK, IL 60523 630-571-9393 https://farmfoundation.org/trade/ that the United States can produce at lower cost up, the jobs moved to Southeast Asia and, more than the other countries can. If everything cost recently, the coastal provinces of China. the same to make in every country, there would be no basis for international trade. Now we are reading press reports of labor shortages in coastal China, which mean that When a country engages in international trade, employers in labor-intensive industries there are its households’ real purchasing power rises. having to pay higher wages to get labor. So, jobs Their incomes stretch further because they can in labor-intensive industries have started moving obtain the goods and services they have been into the interior of China and on to India and buying at a lower cost. The country as a whole Vietnam, where wage rates are lower. As each benefits, too. When a country engages in place loses competitiveness in labor-intensive international trade, it can produce more gross industries, it moves up to more sophisticated and domestic product (GDP) from its land, labor, and higher quality manufactured products. As the capital because it is not using them to produce labor-intensive sectors move to take advantage of things that other countries can produce at lower cheaper labor elsewhere, they leave behind a resource cost. When a country opens its borders significant reduction in poverty in each country to free movement of goods and services, the they depart. market then provides the incentive to move the country’s resources into their highest-value uses, As wages and incomes have risen in each country thereby facilitating economic growth. in succession, that country has become a better market for products in which the United States is Globalization has created the environment in competitive. Looking again to the Asian which export-led economic growth can reduce example, Japan, South Korea, and Taiwan poverty by bidding up wages in low-income became the best markets for midwestern corn countries. As poor people’s incomes rise, they and soybean products as people there gained the gain purchasing power and become better purchasing power to include more animal protein markets for the products that others produce in their diets. Globalization made it possible for more efficiently. This has happened over and them to experience the broad-based, export-led over again, particularly in Asia. economic growth that increased their purchasing power. An example of globalization – Asia At the end of World War II, Japan, Korea, While Asia has a huge population, parts of which Taiwan, and most other East Asian countries are still growing rapidly, large numbers of people were very poor and their wage rates were very alone do not create market opportunities. It low. Japan’s early post-war manufacturing takes purchasing power, along with large exports were cheap in both price and quality, populations, to translate need into effective however its manufacturing industries developed market demand. and matured over time. Japan’s wage rates were bid up by this export-led growth to the point that Globalization and economic development it could no longer compete in the production of The yet-to-be-concluded Doha Round of the the low-end, labor-intensive products and their World Trade Organization (WTO) negotiations manufacture moved to South Korea and Taiwan has put special emphasis on using trade to to take advantage of cheaper labor there. As accelerate economic development in presently South Korea’s and Taiwan’s wage rates were bid low-income countries. Out of the world’s 7.6 billion inhabitants, a significant percentage live in FARM FOUNDATION PAGE | 2 abject poverty. People with little purchasing product takes a lot of skilled labor. However, power do not represent market opportunities. once the product’s launch has been successful and The objective of the Doha Round was to create a a large market develops, its production can be trading environment in which broad-based mechanized and carried out by much less skilled economic growth can occur in the presently low- labor than was required at the outset. At this income countries. Those countries confront the point, it is not unusual for manufacturing to highest barriers to their exports in the very move to another country with abundant supplies products for which they have a comparative of less skilled, and therefore lower-wage, labor. advantage. These products include those made This can happen in a relatively short span of time. by labor-intensive manufacturers, such as As such “commoditization” occurs, whoever can textiles, apparel, and footwear, as well as crops produce the product at lowest cost while meeting that do well in the tropics, such as sugar, rice, the quality standards and delivery schedule of the and cotton. buyer will get the sale. Opponents of globalization often assert that Today, industries rise and fall and rise again in opening up international trade will drag our other countries at a very rapid rate. What is standard of living down to that of low-wage clear, however, is that one of the great benefits of developing countries. They have it exactly globalization is the manner in which it increases backwards. The objective is to accelerate broad- wage rates and purchasing power in previously based economic development that brings wage low-income countries. This has happened over rates in low-income countries up closer to ours. and over again in the past half century. In the process, this will provide people in those developing countries with the purchasing power Any time an employer closes up shop in a that will create better markets for products we community—large or small—it is traumatic to produce more efficiently, and the development of the community and to the individuals involved. better markets will, in turn, create more jobs Plant closings get high-profile coverage in the here in the sectors in which we have a media. About 10 years ago it was reported that comparative advantage. 55,000 American jobs were moving overseas each quarter. One could easily get the Dynamic change in competitiveness impression from the media that all of our jobs Countries’ competitive positions change all the were moving offshore. Not to understate the time. No economy stands still. New mineral traumatic impact on the individuals and deposits are found, and others are depleted. communities concerned, when put in Some countries’ populations grow, while those of perspective, the problem is not nearly as large as others decline. Research may find new it appears in the media. technologies that provide a greater advantage to one country than another. New technologies can Impacts on the labor market: The United States has completely wipe out previous industries. How a well-functioning labor market and a very many buggy whip manufacturers can you find in mobile work force. No one expects any longer the United States today? to stay in a single job throughout a career. Every three months, about 7 million Americans change Impacts of product life cycles: It is normal for a new, jobs and over 400,000 new jobs are created in the high-tech product (e.g., the silicon chip or the United States. The U.S. unemployment rate is personal computer) to go through a life cycle. very low by international standards and there are When first introduced, production of a new FARM FOUNDATION PAGE | 3 large numbers of undocumented workers in jobs costs associated with starting over in another line that most Americans don’t want.
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