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What Is Globalization? Why It Matters

From outsourcing to tariffs, globalization is all over the news these days. What is it?
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Few topics inspire as many strong opinions as globalization. It's a subject that touches on tariffs, jobs and immigration, all topics nearly guaranteed to start a fight at holiday tables.

It won't help anyone to yell at your uncle over the holiday break, even if he has become a human Facebook feed. It will help quite a bit to learn exactly what globalization is and how it works.

So here's the answer:

What Is Globalization?

Globalization means the interconnection of national economies across the world on issues such as trade, investment, labor, banking and the movement of people, goods and services. That seems like a mouthful, but it basically boils down to governments increasingly allowing their citizens do business across borders.

Still, it's a pretty wide-ranging concept.

Globalization is not a precise term. It can mean any way that nations have become interconnected. Although far from a new phenomenon, the term "globalization" gained popularity in the 1990s. The fall of the Soviet Union created the idea of a newly interconnected world, one not divided into the Cold War's armed camps, giving rise to globalization in the popular consciousness.

How Globalization Factors Into Trade and Jobs

The most common form of globalization, certainly the most high profile, is foreign trade.

Globalized trade is the practice of importing and exporting products with other nations. Typically, companies do this in order to access products that they can't find domestically, to open new markets for their products, or to find cheaper business environments through comparative advantage.

Here are these three forces broken down:

1. Access Imports

Some global trade is about bringing in something that you simply can't find at home. This is a decreasing category of trade, since technology and population movement makes it possible to produce most products almost anywhere on Earth. However, history has been powerfully shaped by trade for access, such as when European merchants would literally cross the globe for spices that only grew in Asia.

Brave men and women once died to bring black pepper to English dinner tables. Today's equivalent might be a college sophomore hoping to sneak through customs on his way back from Amsterdam.

Some exceptions notwithstanding, most imports today are about cost. While you can create or grow almost any product anywhere, it's often cost-prohibitive to do so. As a result, companies import.

2. Market Development

Trade also will focus on market development for existing products. This is the other side of imports. A company with something to sell will try hard to trade into new countries, because doing so means access to new consumer populations.

Companies looking to export are, generally, trying to build and open new markets. This has not always ended well. On the other hand, thanks to pursuit of emerging markets, Coca-Cola (KO) is the second most recognized word in the world.

3. Competitive Advantage

Trade also allows companies to seek cheaper business environments, often by finding more inexpensive sources of materials and labor. For American consumers this appears in the form of products made in China, for example, or call centers moved to India. Both nations offer inexpensive source of labor, driving companies to relocate certain operations in an effort to gain an advantage over their competitors.

This is known as competitive advantage.

4. Comparative Advantage

Global trade allows countries to specialize in products and services that they are well suited to provide. This is known as comparative advantage. It's the process of countries using trade to buy cheaply the products it would be more expensive for them to produce, while at the same time specializing in the products they produce most efficiently.

Take, for example, NAFTA's so-called "Auto Alley." Its economy and currency strength makes manual labor far cheaper in Mexico than in the U.S. However, America's education system makes it a generally excellent source of skilled labor. So American car companies do research, development and high-skill production domestically. Then they have their plants in Mexico do the labor-intensive but low-skill work. Often a car will get shipped across the border several times before it's finished, as teams work on the vehicle wherever it's cheapest.

This has led Mexico to capitalize on its labor-intensive workforce and a specialization in America toward a skill-intensive one, as each country takes advantage of its efficiencies compared to the other.

Technology and Globalization

World economies have been interconnected for essentially all of human history, from the Silk Road to Britain's East India Company. By the early 20th century nations had grown so interconnected that historians and economists famouslypredicted the end of armed conflict because nations had grown too economically intertwined. The embarrassing end to those predictions has not stopped modern writers from repeating them.

Yet in the 21st century technology has allowed globalization to take on a more immediate presence in people's lives than ever before.

This is due to a wide number of factors, but perhaps the two most important are telecommunications infrastructure (namely: the internet) and transportation infrastructure. Simply put, it has become faster, cheaper and easier to move products, people and ideas around the world than ever before. Individuals can access intellectual property created anywhere on their phones. Consumers can order products made almost anywhere and have it shipped to almost anywhere with few restrictions and increasingly inexpensive costs.

And companies have merged these communications and shipping technologies to create elaborate networks of production that span the globe. Swift, inexpensive shipment has made modern logistics chains such as NAFTA's "Auto Alley" more possible than at any time in history.

Law and Globalization

Public policy has also played a major role in the expansion of globalization over the past several decades.

Most economists and major governments have come to embrace free trade as an organizing principle of global economics. While trade barriers have not disappeared around the world altogether, today they're considered the exception to the rule. Policymakers often approach free trade as the default position unless there is a reason to make laws otherwise.

This is a change from the mercantilism of the 19th century and the 1930s when trade barriers and tariffs were the rule. In that era governments believed that the best way to encourage growth was to protect domestic industries from foreign competition. Today governments generally believe that growth is best achieved by allowing industries to operate as efficiently as possible, generally by accessing products and labor as inexpensively as the global market allows.

While the public policy issues around globalization are complex, readers should know about three subjects in particular:

1. Barriers

Barriers are outright bans on global movement, such a trade barrier or censorship of outside ideas.

Globalization has done away with most outright trade barriers, however some few do still exist. Countries typically use them as either a political statement or in the case of perceived national security threats. The U.S., for example, tightly controls products that can be shipped to Iran or North Korea and it has only in recent years relaxed a near-total embargo on the island of Cuba.

In China, the Great Firewall is an example of a censorship barrier. It exists not to regulate or change incentives but to stop traffic altogether.

2. Tariffs

Tariffs are a tax which governments place on incoming goods and services. Critically, they are not a tax charged to the foreign government or firms. Domestic companies which import products pay tariffs and pass the cost of that tax on to the consumer.

Governments use tariffs to change the costs of imported products. Typically, these are a protectionist measure, designed to advantage domestic companies over foreign competitors by making the foreign product more expensive.

3. Immigration

Finally, immigration controls are a form of public policy influence over globalization. By regulating the flow of individuals, governments influence the supply of skill and labor within their economy. This in turn affects how industries develop and pay scales domestically.

Criticisms of Globalization

It is generally accepted that globalization leads to greater total wealth among participating nations. By allowing companies to self-select the cheapest and most efficient ways of doing business they are generally able to create more products and services than they would have otherwise.

This is not, however, to say that globalization is without its critics. Three issues in particular stand out among the critiques of globalized economics:

1. Exacerbation of Inequality

While globalization allows for a more efficient movement of goods and services, this tends to advantage large companies at the expense of small ones. Companies with a global reach can take advantage of free trade, offering them a perhaps insurmountable edge against small and midsized firms.

2. Detriment to the Middle Class

Globalization has, in many ways, turned every economy into a global job market. This has enriched billions of workers in developing nations, as their cheap labor brings jobs in from overseas. However, that same process has caused companies to outsource jobs from countries like America to these developing economies.

Critics argue that this undermines the ability of workers to bargain for higher wages and a decent standard of living. Companies will either outsource middle class jobs to places where that labor is cheap, or they will undercut workers with the threat of doing so.

3. Worldwide Recessions

Isolated economies are less vulnerable to the movement of their neighbors, putting them at risk of recessions. In a globalized economy, the decisions of one business community or set of policy makers can have far-reaching consequences. This leaves people around the world vulnerable to economic conditions they may have no control over, as the decision of (for example) voters in Britain imperils job markets halfway across the planet.