9.5 Effects of Globalization
The interdependence principle reminds us that your economic life depends on decisions made by others, including those made by people all around the world. The increasing global integration of economies, cultures, political institutions, and ideas is called globalization. Trade costs have declined because of lower trade barriers, closer political integration, improved telecommunications, electronic banking, the internet, and improved rail, sea, and air transportation. And this has led our lives to become increasingly connected with those of folks living in other countries. But as much as globalization is a trendy buzzword today, it’s not actually new: International trade has been with us, and growing, for centuries. In fact, Christopher Columbus first bumped into America while trying to find a trade route from Portugal to Asia.
Globalization and the Labor Market
Imagine that you work for Boeing, building airplanes. Each plane from your production line embodies some of your labor. And so every time one of these planes is exported to China, so is some of your labor. Effectively, you are selling some of your labor in China. Likewise, each shirt that you import from China embodies the labor of Chinese workers. And so even though American and Chinese laborers don’t directly compete with each other (they’re in different national labor markets), their labor does compete—it’s just embodied in the goods that are traded between countries.
Productivity determines average wages.
This leads some to worry that globalization may force U.S. wages down to the low levels seen in countries like China, India, or Mexico. If all workers were similar, this might be a long-run consequence of international trade. And it would be disastrous for American workers. On average, U.S. manufacturing workers earn $39 per hour, compared to $1.69 in India, $4.11 in China, $2.06 in the Philippines, and $3.96 in Mexico. (The comparable wages in Japan are $26, and in Germany, $43 per hour.)
Fortunately, wages aren’t going to be equalized anytime soon, because workers are not all the same. The productivity of an average American manufacturing worker is 12 times higher than that of their Chinese counterpart. This means that businesses are willing to pay American workers 12 times more. Figure 12 shows that countries with higher productivity tend to enjoy higher average wages.
Figure 12 | Countries with Higher Wages Have Higher Productivity
Data from: Ceglowski and Golub, “Just How Low Are China’s Labour Costs?” World Economy, 30(4), 2007.
International trade is raising income inequality within the United States.
Not all workers in a country benefit from international trade, as it raises some wages while lowering others. In particular, recall that the United States exports skill-intensive goods such as computer software. As trade costs fall, foreign demand for these goods increases. This also increases the demand for highly educated workers. Consequently, globalization raises the incomes of highly educated workers in the United States, because it increases the demand for the stuff they make.
On the flip side, recall that because many of our trading partners have abundant low-skilled labor, they tend to export goods like clothing that use a lot of less-educated workers. As these countries engage in more trade, Americans will import more clothing. This decreases the demand for domestically produced clothing. In turn, this decreases the demand for the predominantly low-wage and less-educated workers in that industry, leading to even lower wages. More generally, globalization reduces the wages of workers in import-competing sectors, and in the United States, these sectors tend to employ a lot of less-educated workers. Consequently, international trade likely explains some of the rising income inequality in the United States over recent decades.
International trade can have the same effect as immigration.
There’s an interesting implication of all this for immigration policy. The government currently restricts the number of foreigners immigrating to the United States to shield domestic workers from foreign competition. But even though foreign laborers can’t enter the United States at will, foreign labor can—at least to the extent that it is embodied in imports produced by foreign workers. And so trade in goods can have the exact same effects that immigration otherwise might, serving as a source of competition for American labor.
Are foreign workers being exploited or offered opportunity?
Opponents of globalization often argue that it is exploitative. When you buy a shirt from China, it was probably made by someone earning less than $2 per hour, often in grim conditions—certainly far worse than would be legal in the United States. And so they might argue that it’s immoral and exploitative to buy cheap shirts made under such bad conditions. Do you agree?
Before answering, consider the counterargument, which invokes the opportunity cost principle, to ask: “Or what?” If Americans stopped buying these shirts, what would happen to the workers that produce them? For many Chinese workers, it’s likely that their next best alternative involves working for an even lower wage. While $2 per hour is a low wage for an American, for many people in rural China, it represents a big improvement in their quality of life.
College students protesting against sweatshop labor have pressured many universities to adopt fair-trade buying policies.
This debate is especially relevant to debates about “fair trade” versus “free trade.” Both sides argue that Americans should continue to trade with people in poor countries. But “fair trade” advocates argue that we should pay higher prices for imports—high enough to ensure a reasonable standard of living for the workers involved. They also argue that U.S. negotiators should insist on including minimum labor standards as a part of new trade agreements. They claim fair trade would yield better working conditions and higher incomes for foreign workers, though at the cost of higher prices in the United States.
But higher prices lead to a lower quantity demanded. So it’s likely that the higher prices for fair-trade shirts would reduce the quantity demanded. And so these policies could destroy the jobs of the very people they aim to help. What are your thoughts on fair trade?