Why Globalization Pays

June 28, 2016 9:30 AM

In the wake of Brexit and Trump, commentators foretell the end of globalization.1 In policy terms, they certainly have a point: Even before Brexit, the World Trade Organization’s Doha Round was dead, the Trans-Pacific Partnership faced political hurdles, and micro-protectionist measures were sprouting like summer dandelions. Anti-globalization policies have contributed to the abnormally tepid growth of world trade and investment since 2010.

But before stuffing pro-globalization policies in the deep freeze, it’s worth recounting the benefits of US engagement with the world economy. In his Sunday column, former Treasury secretary Henry Paulson quoted the Peterson Institute’s calculation that deeper engagement since World War II has raised real household incomes by $10,000 annually.2 Total US GDP gains from post-World War II globalization—resulting both from trade agreements and from transportation and communications technology—now exceed $1 trillion each year.

These gains are delivered through several channels, some of them obvious, others less so. The channels are all linked to the rise of imports, exports, and inward and outward direct investment relative to GDP—a phenomenon that characterized the American economy from the end of World War II to 2010, and then stopped.3

Perhaps most obvious are low prices for imported merchandise found at Walmart, Target, Amazon, and thousands of other retailers. Much of this merchandise is no longer produced in the United States, and if it were produced retail prices would be far higher—think of running shoes, t-shirts, and TV sets. Similarly, US firms raise living standards abroad by exporting goods and services not produced there (Boeing aircraft, blockbuster movies) or made at much higher cost abroad (chicken, corn, CAT scans, turbines). These are the daily benefits of David Ricardo’s comparative advantage, a concept studied by nearly every college student.

Closely related is the channel of greater variety enjoyed not only by household consumers but also by business firms. Thanks to imports they can buy exactly the item they need, whether software applications for designing auto engines or testing pharmaceuticals, or dining room tables crafted from teak or mahogany.

Less obvious, but critically important, is the contribution that global competition makes to productivity per worker. Through the process of “sifting and sorting,” competition compels less productive firms to shrink and enables more productive firms to expand. Hence average productivity per worker rises as high-productivity firms employ a larger share of the labor force. Both imports and exports drive the sifting and sorting process.

A similar but distinct phenomenon is the pressure competition places on managers to improve their game to defend market shares at home and abroad. This applies to any firm that faces a more potent array of competitors. Improving a firm’s game requires new products and processes, calling for more investment in plant, equipment, and R&D. It also requires firms to trim their mark-up margins over variable cost, another obscure but significant channel for globalization benefits, even in the giant US economy.

Linking many of the delivery channels is the fact that globalization saves all countries from reinventing the wheel for each national market. The R&D and specialized knowledge that underlie modern production is enormously expensive, but once discoveries are made they can be applied worldwide with only a fraction of the original expenditure.

It’s not a coincidence that the engine of future globalization—defined as rising imports, exports, and direct investment relative to GDP—has sputtered since 2010, that world economic recovery has been sluggish for the past six years, that all forms of investment have lagged, and that productivity growth per worker in advanced countries since 2010 has been no greater than half the rate enjoyed in the previous 60 years (a little above 1 percent now versus more than 2 percent historically).

Despite political headwinds, world leaders should be urging more policy liberalization and the embrace of future globalization, not a retreat to national borders and national markets. To be sure, leaders should also sharply upgrade adjustment programs for those who lose from globalization. But since globalization gains to the overall economy outweigh losses to affected workers by a ratio of at least 10 to 1, it makes no sense to throw globalization in reverse and make everyone poorer.

Notes

1. In 2010, Kati Suominen and I published Globalization at Risk: Challenges to Finance and Trade, calling out adverse forces that have since flowered into trends.

2. See Scott Bradford, Paul Grieco, and Gary Clyde Hufbauer, “Chapter 2: The Payoff to America from Global Integration,” in The United States and the World Economy: Foreign Economic Policy for the Next Decade, ed. C. Fred Bergsten (Washington: Institute for International Economics, 2005).

3. Between 1950 and 2003, for example, US two-way merchandise and service trade rose from 8.8 percent of GDP to 23.7 percent. Detailed descriptions and econometric evidence of the delivery channels can be found in Bradford, Grieco, and Hufbauer, “Chapter 2: The Payoff to America from Global Integration,” in The United States and the World Economy: Foreign Economic Policy for the Next Decade, ed. C. Fred Bergsten (Washington: Institute for International Economics, 2005).