One thing is for sure, protection and openness to international trade both have income distribution effects. The key question is who reaps the benefits and who carries the burden of the system adopted by a given country. This module may be more important than you think. The topic is international trade and includes aspects of globalization and finance, but the theory explains every transaction we conduct. Why do people work for pay instead of growing their own food, building their own house and making their own clothes?
Most people are capable of painting their own homes, yet professional painters continue to make a good living. How is international trade different from domestic trade?
And yet we often treat foreign and domestic trade as fundamentally different. A grocery chain from a nearby state has recently opened some stores in your neighborhood. How would you feel if the local government prohibited you from shopping at those new stores? In this module, you will learn that just as buying from the local grocery store is better for most people than growing your own food, so international trade can add to your convenience and quality of life.
International trade and finance are often confused as being synonymous with globalization. Indeed, trade and international finance have contributed to globalization but they are not the same.
Globalization is a process that widens, deepens and speeds-up interconnectedness between people, institutions, markets and nations. Trade and finance are two arteries through which the process of globalization flows.
There are many ways to conceptualize globalization. The iPhone is a global product. Apple does not manufacture the iPhone components, nor does it assemble them. That means, that Samsung is both the biggest supplier and biggest competitor for Apple. Why do these two firms work together to produce the iPhone? Figure 1. Apple or Samsung iPhone? So American car companies do research, development and high-skill production domestically.
Then they have their plants in Mexico do the labor-intensive but low-skill work. Often a car will get shipped across the border several times before it's finished, as teams work on the vehicle wherever it's cheapest. This has led Mexico to capitalize on its labor-intensive workforce and a specialization in America toward a skill-intensive one, as each country takes advantage of its efficiencies compared to the other.
World economies have been interconnected for essentially all of human history, from the Silk Road to Britain's East India Company. By the early 20th century nations had grown so interconnected that historians and economists famously predicted the end of armed conflict because nations had grown too economically intertwined.
The embarrassing end to those predictions has not stopped modern writers from repeating them. Yet in the 21st century technology has allowed globalization to take on a more immediate presence in people's lives than ever before. This is due to a wide number of factors, but perhaps the two most important are telecommunications infrastructure namely: the internet and transportation infrastructure.
Simply put, it has become faster, cheaper and easier to move products, people and ideas around the world than ever before. Individuals can access intellectual property created anywhere on their phones.
Consumers can order products made almost anywhere and have it shipped to almost anywhere with few restrictions and increasingly inexpensive costs. And companies have merged these communications and shipping technologies to create elaborate networks of production that span the globe.
Public policy has also played a major role in the expansion of globalization over the past several decades. Most economists and major governments have come to embrace free trade as an organizing principle of global economics. While trade barriers have not disappeared around the world altogether, today they're considered the exception to the rule. Policymakers often approach free trade as the default position unless there is a reason to make laws otherwise.
This is a change from the mercantilism of the 19th century and the s when trade barriers and tariffs were the rule. In that era governments believed that the best way to encourage growth was to protect domestic industries from foreign competition. Today governments generally believe that growth is best achieved by allowing industries to operate as efficiently as possible, generally by accessing products and labor as inexpensively as the global market allows.
While the public policy issues around globalization are complex, readers should know about three subjects in particular:. Barriers are outright bans on global movement, such a trade barrier or censorship of outside ideas.
Globalization has done away with most outright trade barriers, however some few do still exist. Countries typically use them as either a political statement or in the case of perceived national security threats.
The U. In China, the Great Firewall is an example of a censorship barrier. It exists not to regulate or change incentives but to stop traffic altogether. Tariffs are a tax which governments place on incoming goods and services. Critically, they are not a tax charged to the foreign government or firms. Domestic companies which import products pay tariffs and pass the cost of that tax on to the consumer.
Governments use tariffs to change the costs of imported products. Typically, these are a protectionist measure, designed to advantage domestic companies over foreign competitors by making the foreign product more expensive.
Finally, immigration controls are a form of public policy influence over globalization. By regulating the flow of individuals, governments influence the supply of skill and labor within their economy. This in turn affects how industries develop and pay scales domestically. It is generally accepted that globalization leads to greater total wealth among participating nations.
By allowing companies to self-select the cheapest and most efficient ways of doing business they are generally able to create more products and services than they would have otherwise. This is not, however, to say that globalization is without its critics. Three issues in particular stand out among the critiques of globalized economics:. While globalization allows for a more efficient movement of goods and services, this tends to advantage large companies at the expense of small ones.
Companies with a global reach can take advantage of free trade, offering them a perhaps insurmountable edge against small and midsized firms. Globalization has, in many ways, turned every economy into a global job market. This has enriched billions of workers in developing nations, as their cheap labor brings jobs in from overseas. However, that same process has caused companies to outsource jobs from countries like America to these developing economies.
Critics argue that this undermines the ability of workers to bargain for higher wages and a decent standard of living. Companies will either outsource middle class jobs to places where that labor is cheap, or they will undercut workers with the threat of doing so. Isolated economies are less vulnerable to the movement of their neighbors, putting them at risk of recessions. In a globalized economy, the decisions of one business community or set of policy makers can have far-reaching consequences.
This leaves people around the world vulnerable to economic conditions they may have no control over, as the decision of for example voters in Britain imperils job markets halfway across the planet.
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