Policy Perspectives: Globalization: The Real Competitive Threat

September 30, 2008
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The use of “international trade” and “globalization” interchangeably often results in international trade being blamed for competitive threats, when globalization actually is the root cause. Globalization results from increased international integration, while trade is a vehicle of globalization.

Globalization is the result of a host of factors, among them technological advances, political changes, and economic policy choices. Technology makes communication, production, and logistics and transportation easier, faster and cheaper. Economic policies that encourage liberalization and deregulation open economies to foreign direct investment. And political changes introduce previously isolated countries into the international marketplace, foster regional blocs to leverage synergies, and spur reforms that provide rule of law and encourage investment in infrastructure.

International trade is encouraged by the reduction of barriers and costs of entry, and is driven by factors such as comparative advantage and new market access. It is a vehicle to participate in globalization. Trade agreements can define the effectiveness of that vehicle, by increasing as well as regulating trade. 

The potential consequences of trade and of globalization are distinct. Rapidly developing economies increase competition for various commodities. As explained in the CRS report Globalization, Worker Security, and Policy Approaches, “most research indicates that trade plays only a limited role in generating the economic losses or concerns, [it] gets most of the blame because of its visibility, particularly in the guise of new trade agreements.” Nevertheless, trade often is linked to the opening of national industries to international competition and displacing workers. This leads to the appealing assumption that limiting or discouraging trade can prevent such negative consequences. 

Trade as a proxy for globalization also has been blamed for growing income inequalities but, upon examination, this tends not to be the causal factor. A recent IMF working paper “Rising Income Inequality: Technology, or Trade and Financial Globalization?” notes that tariff liberalization usually results in lower income inequality. But the conclusion reached is that “the observed rise in inequality…is largely attributed to the impact of technological change.” Technology advances and globalization have contributed to the increase of the “premium on skills and substitutes for relatively low-skill inputs.”

Trade policies thus are an incomplete response to globalization. 

Success in a globalized world depends on structural changes, such as developing human and physical infrastructure, rule of law, transparent regulatory systems, labor market efficiency, financial sophistication, technological readiness, and political stability. Countries with policies that promote these factors are better able to compete in the global economy, those that don’t lag behind.

When trade agreements become the proxy for globalization, and solutions to economic disruptions are defined in terms of “trade” disruptions, (e.g. U.S. Trade Adjustment Assistance), solutions are incomplete. The U.S. political debate remains about Trade Adjustment Assistance as the Congress attempts to respond to deteriorating economic conditions, trade-related demands, and political constituencies. 

When policymakers and the public equate globalization and international trade, long-term solutions will not be found. The dialogue must distinguish between trade and globalization, recognizing both their positive and negative potentials. Only with that focus can there be a productive discussion on how to benefit from the opportunities and accommodate the competition that globalization will continue to drive. wt

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