American · Economics · Politics · Uncategorized

The Future of Globalization

Ever since the Twentieth Century, our world has become increasingly smaller as international interaction has grown in the form of diplomacy, immigration, and arguably most importantly, trade. Today we function on a globalized economy that depends greatly on trade among nations to provide greater competition and easier access to a variety of goods and products. World exports and imports now make up as much as 60% of the world’s GDP.

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Right now, it appears that this (New?) world order is in danger of falling apart, as movements across the Western world are rising in rejection to the global economy, as evident from the groundbreaking results of two distinct political elections in the past year.

During late June of 2016, the citizens of the United Kingdom made a shocking decision to vote in favor of leaving the European Union, the economic union that has promoted trade and cooperation between 28 countries of Europe. A little over four months after this surprising result, the United States followed suit with the shocking election of businessman Donald Trump as President. Political Pundits across the Western world were shocked, wondering what it was that motivated so many voters to vote for positions that rejected what was believed to be the consensus values of multiculturalism and globalized cooperation and trade.

These results have come as a great shock to many experts. Economists are known for being in disagreement about many things, but when it comes to international trade, there is a strong consensus that the merits of free trade outweigh the costs of it. Yet, the United Kingdom’s decision to leave the European Union and the United States’ election of trade protectionist in Donald Trump makes it clear that many Americans do not see these merits. These are extremely consequential political decisions that have been made, and the voters for these political shakeups have made it clear that we cannot simply chalk up their rejection of international trade and cooperation to “they don’t understand how trade makes their lives better”.

So where is the disconnect coming from? Economists are saying that free trade is beneficial to everyone for its ability to transition America away from low-paying low skill jobs to more productive tertiary-sector service jobs, thus improving living standards. However, the American Rust Belt seems to show a sizable amount of people who have lost their manufacturing jobs and have ended up in a helpless situation of perpetual unemployment in a time when it’s become essentially impossible to get a job without a college education. Since 2000, the United States has lost 5 million manufacturing jobs (although technology, along with globalization, has contributed to this), and the places where these job losses were hit the hardest had the biggest political impact during the 2016 Presidential Election, as Rust Belt states Michigan, Wisconsin, Ohio, and Pennsylvania, many of which are traditionally blue states, all went for Trump.
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Along with that, while wages for the upper class have been rapidly rising for years now, wages for middle and lower class workers have been stagnant or even decreasing.

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It is unclear whether this troubling trend is caused by globalization explicitly benefiting the rich and no one else, but it is clear that the current economic order has not improved the living standards of a large chunk of Americans for several decades now, and the current political climate clearly indicates a backlash to this existing order.

To better understand the situation revolving around globalization, there are a variety of different factors to consider when it comes to globalization’s functions of seeking comparative advantage in specialization, and thus, making tradeoffs in the prioritization of certain industries. What does this mean for distributional effects? How has the factor of technology, along with trade, also played into the dynamic economies in the West?

Let’s look into each of these concepts to see how accurate the narrative about globalization’s contribution to inequality is.

Opponents of International Trade

So is globalization responsible for this growing income inequality in America? On the surface, there seems to be some merit the narrative. After all, part of what globalization and international trade is a deliberate reshuffling of a country’s economic priorities. In the case of developed nations like the United States, this means moving on from lower-skilled industries in manufacturing to higher-skilled industries that the United States has a comparative advantage in over other countries. However, this means that the people who lose their lower-skilled jobs to global competition of countries with lower labor standards are forced to find employment in higher-skilled jobs. It is essentially an economic tradeoff occurring with globalization, and understandably the losers in this tradeoff feel left behind.

There’s no doubt that international trade has given us winners and losers, and among the losers has been the manufacturing industry, while the winners have been higher-skilled industries like finance, computer design, and engineering. What do things look like for the losers of trade? Well, while employment opportunities for those with better education are growing, employment opportunities for US workers in the middle income bracket are shrinking.

Economists seemed to believe that workers would be able to transition to these newly prioritized jobs with relative ease. Unfortunately, this has not appeared to be the case. A White House analysis of the labor market finds that the lower demand for low-skilled jobs has had a downward pressure on wages. This is why even though the unemployment rate is down to 4.5 percent, many Americans are still discontent, as it seems the earnings of their new jobs tend to be depressed by 10 percent or more relative to their previous job, and in many cases, people have simply fallen out of the labor force.

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The government has offered reemployment services and job training to people who have been displaced by trade agreements like NAFTA or with China, but this is where it’s important to consider personal cost. Workers who have lost their jobs are well into adulthood, in their 40s and 50s, and in many cases they don’t want to learn new skills. The stories of these disenfranchised middle class Americans shine a spotlight on the damage the shift towards globalization has caused to certain groups of people.

Along with growing income inequality and prioritization of white collar jobs over blue collar ones, another factor that has fuelled sentiment of the global economy not working for everyone has been the narrative surrounding trade agreements.

President Trump recently scrapped the highly unpopular Trans-Pacific Partnership (TPP) Agreement. Part of why this trade agreement was unpopular was because of the information that Americans got out about its content. The only information we knew about it came from leaks, as the agreement never came to full fruition, being still in secret negotiation stages when Trump put an end to it. However, what we did know about the TPP was that, for the most part, it contained a lot of provisions regarding the conduct of corporations rather than actual details on tariffs and trade barriers.

Concerns about the TPP included intellectual property rights rules that would be of great benefit to pharmaceutical companies and potentially keep patients of other countries from life-saving medicines due to inability to afford given property-protected drugs. Along with that, there are rules that allow foreign investors to sue governments if certain regulations harm their interests, which raised concerns about the possibility of the trade agreement getting rid of country regulations that could be there to protect the vast majority of people’s interests in terms of health or the environment.

Some of these pro-corporate provisions in the trade agreement have only fuelled the narrative among many of the disillusioned lower and middle class that globalization and trade only exists to serve the interests of the rich and powerful, a narrative that Trump took great advantage of in the election.

Overall, while there certainly seems to be benefits to be had from globalization for services sector that rely on better skills and education, these benefits are not shared by working class industries like the manufacturing sector. The nature of the trade-off in international trade does not directly cause the inequality in wage growth seen in the earlier graphic, but it is not unreasonable to say that the disillusioned Rust Belt workers are not wrong in their assessment that the benefits of globalization that economists speak of have not be distributed to them. Therefore, there is merit to their narrative, and this situation is, at the core, fuelling the crucial debate over globalization during this tumultuous political period.

Supporters of International Trade

So with all the suffering many of these working class people have had due to globalization, why are economists so insistent that trade has been good for everyone involved?

Upon evaluation of NAFTA, there are clear benefits that the United States has had from this trade deal. Estimates find that NAFTA has increased US GDP by 0.5 percent relative to if it did not participate in NAFTA, a modest, but still positive effect. Also, while many manufacturing jobs have been lost due to trade, there are also around 14 million jobs that rely on trade with Canada and Mexico. These jobs are mostly concentrated in the service sector, such as retail, finance, and healthcare.

The reason for this is partly because of the comparative advantage that the United States has in these industries of higher-skill and education over other developing countries like Mexico. Lower-skilled jobs like auto manufacturing go from the United States to Mexico, while the United States specializes in the service industries by giving these industries a larger market to profit from in exporting to Mexico or Canada. Along with that, because of the fact that comparative advantage allows for certain imported goods to be cheaper for consumers (like a washing machine), people then have extra money that they can spend on other sectors, and this benefit sprinkles across the economy to benefit a variety of American companies, all because of the efficiency of trade. Among the main goods that are cheaper here because of trade in NAFTA are fruits, vegetables, chocolate, and beef.

Another way in which trade has benefited the U.S. economy, as the Wilson Center finds, is by making American industries more competitive and efficient. The increased availability that trade provides for imports of inputs U.S. businesses improve the competitiveness of these industries. The availability of more cost-efficient inputs allow US industries to stay above the fray against international competition, which means that the result is a higher-quality product with a lower cost for consumers. For example, the US auto industry has become more efficient due to trade, as the parts of American cars are made in all 3 countries of NAFTA, and the consolidation of manufacturing input costs has allowed the US auto industry to produce car products that are competitive with Japanese imports. With the help of Mexican suppliers, US industries are improving productivity and competitiveness, and this results in positive growth in terms of jobs and GDP.

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Now, some critics of America’s free trade agreements like to point to the trade deficit that the United States has built up. For instance, as of 2014, the United States has a $54 billion trade deficit to Mexico.

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China also owes $843 billion of US debt due to the trade deficits that America has built up with China. The reason why I’ve included this fact in the “supporters” section of this piece is because the implications of America’s trade deficit is not as simple as critics of it like to make it seem. While more imports than exports means losing jobs abroad, it also leads to more foreign investment in the country.

This happens because when a country runs a trade surplus, keeping the surplus money will cause the value of that country’s currency to go up, and this will make it harder for it to export out cheap goods then, which is why the country will likely take that money out and put it into foreign countries. In the case of China, they do this for America in the form of purchasing Treasury bonds and making direct investments into the United States.

In 2014, foreign direct investment in the United States was $2.9 trillion, and this is largely due to the idea of balance of payments, where a country with a deficit in current account (trade) will presumably have a surplus in capital or financial account (foreign direct investment). Investment in the American economy involves building new factories, investing in improving production opportunities, and research and development. American sectors that have received the most funding from FDI have been the manufacturing sector, hit hard by international trade, the finance and insurance sector, the banking sector, the information sector, and the scientific and technological services sector. This creates jobs, economic growth, and further development and improvement of American industries.

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Having gone over each side of the argument in the globalization debate, it appears that the clearest thing about it all is that there is a solid case to be made for both the benefits and the failures of the global economy. With the tradeoff in globalization in mind, how do we decide which choice is the best one to make? Does the net distributional benefit of globalization’s impact on a variety of service industries outweigh the catastrophically focused damage to the lower-skilled middle to lower class done by it? It is extremely hard to come to a decisive conclusion, but one factor that has an incredibly important part in the debate is technology. Why is that? Well, let’s take a look.

Technology’s Role in the Economy

Part of the volatility surrounding the issue of globalization is due to the fact that it shakes up people’s livelihoods. The decisions made for globalization are part of the shifting of the economy, and many people have fallen off because of this shift. The reason why technology is an important factor to consider when debating the issue of globalization is because technology has played a similar role in shaking up the dynamics and priority of the economy, and this adds a new dimension to consider in the debate.

Technology was a huge factor in the Industrial Revolution. If you remember, the cotton gin was revolutionary because it made agriculture production far more efficient, which meant that Western economies began to shift away from the agrarian economy to the industrial economy, as people had the luxury of taking up a profession other than in agriculture and still be able to feed their families. Today, technology is playing a similar role on our manufacturing sector. Technological innovations like the Internet of Things, 3D Printing, and Automation have made the manufacturing sector more productive than while employment numbers in the sector have consistently fallen.

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Because of technological output and productivity, this has contributed to the rendering of manufacturing jobs as obsolete. This is not to say that global trade agreements have not also been part of the process in manufacturing jobs going away, but when you look at the distribution of the American labor force by sector over the years, you’ll see that even before trade agreements like NAFTA, the industry sector was trending downwards.

Screen Shot 2017-04-30 at 11.55.36 PM.pngThese trends indicate that globalization did not arbitrarily choose to bring the manufacturing industry sector down, but that it simply went along the tide of the wind and using comparative advantage, accelerated the transition away from the industry. This does not make the victims of this process less sympathetic, but it means that President Trump can’t just bring back manufacturing jobs by putting up tariffs on trade, because in domestic manufacturing companies it is more cost-efficient to use a robot that costs $8 an hour for production than it is to use a human who costs $25 an hour.

Therefore, for all the talk that politicians often make about manufacturing and the popularity that protectionist rhetoric of tariffs and “bringing back jobs” and “Made in America” have, it is hard to plausibly imagine a way to bring back manufacturing jobs in the abundance that it once was at and at the wages it once was at due to both globalization as well as the technological progress we have made.

Conclusion  

Part of what has made the anti-globalization so strong is likely due to the distributional nature of globalization’s effects. While the benefits of globalization come through a step-by-step process of nuance involving often unnoticed drops in prices of goods and the distributional benefits towards a variety of different industries, the benefits of globalization have come in a more distributional and stretched out nature that isn’t as notable in comparison to the concentrated damage of globalization on the living standards of lower class, uneducated workers.

However, while my firm belief in the social contract of society makes me believe that there needs to be more explicit action taken in order to address the distributional inequities in this process of America’s transitioning, dynamic economy, factors of comparative advantage and technology make me believe “bringing back” jobs is not the answer.

Comparative advantage has allowed us to take advantage of all available resources in order to provide a diverse variety of cheaply produced high quality goods that progress both our economy and our society forward. The tradeoff for this is that we lose industrial jobs and economic pain is concentrated greatly into target areas of lower income and education. However, the problem with rejecting the global order is that not only will we lose the aforementioned benefits of trade, but because of how technology has transformed the landscape of labor, we can’t simply go back to old times and trade back every single lost job. At this point, reversing course would produce definite net negatives, which means the only way to go is forward.

With this understanding, I believe we should continue along the path of progress and growth that globalization provides. However, this comes with the understanding that the global economy has left many people behind, and that’s what these recent political elections have shown a light on. The path forward in addressing globalization has to involve forward thinking in order to address the problem of finding a way to bring the lower-educated working-class people into the fold of globalization’s benefits. This will not happen with demagogic “solutions” that lack a nuanced understanding of complexity of the issue. I don’t pretend to have the magical solution to the issues we face with globalization, but if we don’t come to a specific solution soon, then income inequality and disenfranchisement among the poor will only grow. This is a dynamic that will allow radical and simplistic political ideas to further grow as well, and that might put the entire order of globalization and the progress it has brought in danger.

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