Trần Thiên Phước
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During the late 20th and early 21st century, the world experiences a rapid growth of a phenomenon known as “globalization”, which economically refers to the liberation of trade, or commonly known “free trade”. This phenomenon evidently created momentous economic results, yet faced with stiff and growing resistance from many other people; the cause of such paradox was that there are pros and cons of this phenomenon.
The fundamental justification of the “free trade” resides in the concept of comparative advantage. Simply stated, comparative advantage dictates that each nation should specialize in those products that it produces the least inefficiently compared with production in other nations for which no nation could produce every goods and services at the highest level of efficiency. For example some countries are good at producing automobiles, while others are good at producing computers, hence if each country specializes in producing what it is relatively good at, then through trading, the world as a whole can have higher standards of living.
Let’s take a more closely examined example to understand how it works. Take United States and Japan as an example where if US could produce 5 automobiles and 20 computers whereas Japan could produce 10 automobiles and 15 computers, providing the fact that both using the same amount of resource. Notice that US gives up 4 computers to produce 1 automobile, but Japan only gives up 1.5 computers to produce 1 automobile, clearly demonstrated that the US had a higher opportunity cost of producing automobiles, or in another word Japan has a comparative advantage of producing automobiles. If the U.S. specializes in the production computers while Japan specializes in the production of automobiles then the US would be able to produce 40 computers and the Japan produce 20 automobiles, and then the two nations equally trade goods, both nation would be able to consume 10 automobiles and 20 computers (higher than the consumption if they didn’t trade to each other), thus leading to higher standard of living.
Although the advantage of globalization and liberation of trade is obvious, there are arguments against them, known as protectionism. Most significant and foremost argument of the protectionism is that by restricting the globalization and liberation of trade, domestic industries would be more competitive (because there are less competition), thus domestic jobs will be spared and/or expanded. Another distinguished argument for the protectionism was to protect the infant domestic industries against foreign competition until it becomes stronger and matures enough to be able to survive when the barriers are lifted. Also the protectionists argue that by increasing tariffs, the government would increase its revenue for necessary expenditures.
There are other arguments against globalization, yet these three arguments mentioned are most appealing the common men and often misled them. Let’s revisit those arguments and take a closer examination. Take the idea that by imposing trade protection, the price of domestic and foreign goods rise, in return, certain American jobs are preserved. Nevertheless, all the consumers pay a higher price than they otherwise would pay for the products that they purchase. It is often estimated that the cost to American consumers to save one job through protectionism is $100,000 to $150,000; this is a very inefficient way to save certain jobs because we as a society would do better to pay the affected workers, say, $50,000 each in unemployment compensation per year rather than impose tariffs.
As for the argument that protectionism policies would protect infant domestic industries, this argument sounds reasonable at first glance but is commonly misperceived. If the infant industry is so promising within a particular nation, why won't private financial markets support the firms and carry them through the early years? It could be that financial markets don't work well, although that certainly isn't true in the U.S, but even under this scenario why not grant government subsidies instead of tariff protection? In addition, the infant industry tends not to grow up because the protection rarely ends due to political lobbying from the industry.
For the argument that by increasing tariffs, the government would increase its revenue for necessary expenditures, it is true that tariffs raise revenue for the government; this method is a very inefficient way to raise revenue because consumers end up paying for much of the tariff via higher consumer prices. The government could raise an equivalent amount of revenue by raising corporate and/or personal income taxes.
However true all those ideas might be, they are only theoretical arguments, thus let’s take a look at a real life example, which is the NAFTA to test the validity of those arguments. NAFTA stands for North American Free Trade Agreement, which is a pact implemented in 1994 between the U.S., Mexico, and Canada which eliminated or will eliminate most of the tariffs and other trade restrictions between the countries. The initial and immediate impact of the NAFTA was the decrease in prices of goods, thus led to an increase in consumption and productions of the exporters. A slow but gradual impact of the NAFTA was the economic pressure on the Mexican farmers who now had to compete with the subsidized American farmers, and many of them were forced out of business. Another statistics shows that since joining the NAFTA, poverty has risen considerably and the wages decreased as much as 20 % in some sectors; these factors contributed to the cause that led to an increase in illegal migration of the Mexicans to the America. Another impact of the globalization was the outflow of investment from Canada and America into Mexico, along with many jobs (though most of them are jobs that didn’t require a high skill and education), which led to the misconception that the Canadian and American were losing jobs to the Mexicans. As a result of the shift in less-skill-and-education industries to Mexico, Canadian and American investors concentrate on high-tech industries such as software, computer, shipbuilding etc, which created jobs with higher wages and efficiency. Statistically proven that since NAFTA was signed, there has been economic growth in all three nations, and an relative increase in the standard of living in Canada, and especially in Mexico, when compared to that in the United States (despite the higher poverty rate and wages decreased in Mexico, which was believed to reverse when the Mexican economy familiarly integrated into this larger environment); NAFTA has helped to integrate the three economies, which is seen as a benefit in Canada and Mexico where being attached to the largest economy in the world has great benefits because Canadian and Mexican exporters got a tap on the high-consuming American consumers.
With all the reasons argued above, I strongly believe that globalization and liberation of trade would help to increase the people’s standard of living, create prosperity and stability, not to mention the advantages of the cultural exchanges as a result of these.
The fundamental justification of the “free trade” resides in the concept of comparative advantage. Simply stated, comparative advantage dictates that each nation should specialize in those products that it produces the least inefficiently compared with production in other nations for which no nation could produce every goods and services at the highest level of efficiency. For example some countries are good at producing automobiles, while others are good at producing computers, hence if each country specializes in producing what it is relatively good at, then through trading, the world as a whole can have higher standards of living.
Let’s take a more closely examined example to understand how it works. Take United States and Japan as an example where if US could produce 5 automobiles and 20 computers whereas Japan could produce 10 automobiles and 15 computers, providing the fact that both using the same amount of resource. Notice that US gives up 4 computers to produce 1 automobile, but Japan only gives up 1.5 computers to produce 1 automobile, clearly demonstrated that the US had a higher opportunity cost of producing automobiles, or in another word Japan has a comparative advantage of producing automobiles. If the U.S. specializes in the production computers while Japan specializes in the production of automobiles then the US would be able to produce 40 computers and the Japan produce 20 automobiles, and then the two nations equally trade goods, both nation would be able to consume 10 automobiles and 20 computers (higher than the consumption if they didn’t trade to each other), thus leading to higher standard of living.
Although the advantage of globalization and liberation of trade is obvious, there are arguments against them, known as protectionism. Most significant and foremost argument of the protectionism is that by restricting the globalization and liberation of trade, domestic industries would be more competitive (because there are less competition), thus domestic jobs will be spared and/or expanded. Another distinguished argument for the protectionism was to protect the infant domestic industries against foreign competition until it becomes stronger and matures enough to be able to survive when the barriers are lifted. Also the protectionists argue that by increasing tariffs, the government would increase its revenue for necessary expenditures.
There are other arguments against globalization, yet these three arguments mentioned are most appealing the common men and often misled them. Let’s revisit those arguments and take a closer examination. Take the idea that by imposing trade protection, the price of domestic and foreign goods rise, in return, certain American jobs are preserved. Nevertheless, all the consumers pay a higher price than they otherwise would pay for the products that they purchase. It is often estimated that the cost to American consumers to save one job through protectionism is $100,000 to $150,000; this is a very inefficient way to save certain jobs because we as a society would do better to pay the affected workers, say, $50,000 each in unemployment compensation per year rather than impose tariffs.
As for the argument that protectionism policies would protect infant domestic industries, this argument sounds reasonable at first glance but is commonly misperceived. If the infant industry is so promising within a particular nation, why won't private financial markets support the firms and carry them through the early years? It could be that financial markets don't work well, although that certainly isn't true in the U.S, but even under this scenario why not grant government subsidies instead of tariff protection? In addition, the infant industry tends not to grow up because the protection rarely ends due to political lobbying from the industry.
For the argument that by increasing tariffs, the government would increase its revenue for necessary expenditures, it is true that tariffs raise revenue for the government; this method is a very inefficient way to raise revenue because consumers end up paying for much of the tariff via higher consumer prices. The government could raise an equivalent amount of revenue by raising corporate and/or personal income taxes.
However true all those ideas might be, they are only theoretical arguments, thus let’s take a look at a real life example, which is the NAFTA to test the validity of those arguments. NAFTA stands for North American Free Trade Agreement, which is a pact implemented in 1994 between the U.S., Mexico, and Canada which eliminated or will eliminate most of the tariffs and other trade restrictions between the countries. The initial and immediate impact of the NAFTA was the decrease in prices of goods, thus led to an increase in consumption and productions of the exporters. A slow but gradual impact of the NAFTA was the economic pressure on the Mexican farmers who now had to compete with the subsidized American farmers, and many of them were forced out of business. Another statistics shows that since joining the NAFTA, poverty has risen considerably and the wages decreased as much as 20 % in some sectors; these factors contributed to the cause that led to an increase in illegal migration of the Mexicans to the America. Another impact of the globalization was the outflow of investment from Canada and America into Mexico, along with many jobs (though most of them are jobs that didn’t require a high skill and education), which led to the misconception that the Canadian and American were losing jobs to the Mexicans. As a result of the shift in less-skill-and-education industries to Mexico, Canadian and American investors concentrate on high-tech industries such as software, computer, shipbuilding etc, which created jobs with higher wages and efficiency. Statistically proven that since NAFTA was signed, there has been economic growth in all three nations, and an relative increase in the standard of living in Canada, and especially in Mexico, when compared to that in the United States (despite the higher poverty rate and wages decreased in Mexico, which was believed to reverse when the Mexican economy familiarly integrated into this larger environment); NAFTA has helped to integrate the three economies, which is seen as a benefit in Canada and Mexico where being attached to the largest economy in the world has great benefits because Canadian and Mexican exporters got a tap on the high-consuming American consumers.
With all the reasons argued above, I strongly believe that globalization and liberation of trade would help to increase the people’s standard of living, create prosperity and stability, not to mention the advantages of the cultural exchanges as a result of these.
