Globalization Perpetuates Economic Interdependence between Countries
A nation has a comparative advantage at producing a good or service if they can produce it at lower costs than other nations. In Adam Smith’s book, The Wealth of Nations, he proposed the idea that, If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the product of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished. but only left to find out the way in which it can be employed with the greatest advantage.” Determining what county has the comparative advantage is at the core of globalization.
As a result of countries being able to maximize their manufacturing abilities, productivity and living standards rose in surrounding locations. Outsourcing production to other countries creates jobs in remote locations. In addition, globalization creates global competition. Global competition allows nations with the comparative advantage to produce goods at a cheap cost, which keeps prices low for consumers. By keeping prices low, counties are able to decrease the opportunity for inflation to derail economic growth. Furthermore, globalization spurs innovation and presents the market with new innovative ideas formed to global collaboration.
While there are both benefits and consequences of globalization, both parties would agree that in essence, globalization is all about taking advantage of efficiencies and opportunities the global market creates. Whether people like globalization or not, the reality is that globalization is very much present and active in todays global economy. Understanding the implication of globalization guides economists to see how international financial arrangements occur.
The North American Free Trade Agreement, European Union, and other bilateral trade agreements are among the few international financial agreements created to use globalization to benefit world trade. On January 1, 1994 the North American Free Trade (NAFTA) agreement eliminated all remaining duties and quantitative restrictions between Canada, Mexico and the United States. NAFTA became the largest free trade area in the world, and as a result, it linked 450 million people. Through this agreement, these nations combined, produced over $17 trillion dollars of goods and services. Since the creation of NAFTA, trade between these nations has grown substantially.
While bilateral trade agreements have had their benefits, not all countries agree with this form of trade. Protectionism, the economic policy of restraining trade between countries through increased tariffs on goods, has also impacted the global economy. Government regulations, which are designed to create restrictive quotas, have been implemented in order to promote fair competition between imported goods, services and products produced domestically. Protectionism benefits countries by ensuring that domestic organizations have the ability to thrive within their own borders. In a sense, protectionism is anti-globalization. This doctrine seeks to protect businesses and workers within a nation by prohibiting or restricting trade with foreign nations. An example of the benefits of protectionism are seen when administrative barriers and tariffs aid in keeping foreign companies from underselling and undercutting local competition. Those who argue against protectionism believe protection laws halt foreign investment, leaving countries with poor inefficient local businesses. To many, protectionist laws prohibit domestic businesses from adapting to the competitive demands of the global economy.
By observing the implications of globalization, and understanding the complexity of world trade, it is clear that the isolationist position the United States held in the past is far behind us. Understanding and predicting the impact of world trade is a crucial component of understanding the global market and fostering economic advancement.
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