In Defense of Free Trade and Globalization

Suppose there are two countries: The United States and France. The people of both countries desire computers and wine, so businesses in both countries produce those products. Due to economic conditions, the United States produces computers that are fast and cheap, while its wine is bitter and expensive. Due to different conditions, France produces wine that is sweet and inexpensive, while its computers are slow and overpriced. As long as trade barriers exist between the two countries, two separate markets for each category of products will exist. As a result, consumers in the United States spend more money to purchase bad wine, and those in France waste money while buying slow computers.

What should both countries do? The logical answer is that the two countries should drop their trade barriers and become a single market: The United States should make more computers, and France should produce more wine. The United States should then sell its computers to France, and France should sell its wine to the United States. As a result of this trade policy, the people of both countries receive quality products in each category at low prices. Everyone wins. This, in a simplistic nutshell, is the economic justification for globalization and free trade. When countries trade, people generally win.

The central problem in economics is the issue of scarcity - in other words, how can societies can use their limited supplies of resources most efficiently? In the hypothetical example I provided earlier, is it better for the United States to produce wine or computers? Is it better for France to produce computers or wine?

The justification for the answer - that each country should produce that which it can make most efficiently - lies partly in the idea of economies of scale: "a production process in which an increase in the scale of the firm causes a decrease in the long-run, average cost of each unit." (This is why Wal-Mart is so successful - they purchase goods in such high quantities that they can resell them at the lowest prices.) In other words, increasing the size of the market increases the ability of companies and societies to produce better products at cheaper costs. When there is increased competition and access to more resources and labor, only the best and cheapest products will survive. The end beneficiary is the consumer.

Now, take the example I provided earlier, and extend it to the entire world. Every country would be competing with every other country for primacy in thousands of business sectors and over millions of products. When this process occurs uninhibited, the quality of products increases, and their prices fall. In the end, consumers throughout the world benefit because a single global market creates an immense economy of scale. This is why general worldwide inflation (not counting food and energy), is at historic lows at a level of roughly 2 percent. Globalization makes poor countries richer, and it keeps prices low in rich countries.

I have not written anything that should surprise anyone. Nearly all mainstream economists have made similar points because the theory is commonly known. But if the effects of free trade and globalization are obviously positive in the long run, then why are economists, U.S. presidential candidates before the 2008 election, and the American public becoming increasingly skeptical? The answers lie in psychology and journalism.

First, we need to return to my hypothetical example of the United States and France, and their computers and wine. If the United States and France were to stop producing wine and computers respectively because it became inefficient, then workers in those industries would lose their jobs. Those employees would reason that globalization cost them their jobs, and they would be correct. However, their understandable emotions do not recognize the larger, rational context. The effect of losing their jobs would understandably loom larger in their minds than the fact that they have generally paid less for many consumer goods - or, more accurately, that prices have increased at lower rates than in the past - over the past several years. They probably do not even realize that they have been paying less because the change has been incremental over time. However, they certainly know that they do not have jobs. So, to those workers, globalization is a negative trend. It is understandable that they cannot see the big picture because they are worried about the security of their families.

The mainstream media does little to help. The losers in globalization receive much more attention than the winners because those stories are exciting to tell - and sexy stories translate into more television viewers and newspaper subscribers. It is easier to tell a story about layoffs in a thirty-second soundbite on "Lou Dobbs Tonight" than to discuss a complex economic theory. Commentators who support globalization and free-trade, like Thomas Friedman of the New York Times, need to explain the benefits of globalization as often as possible. But it is difficult in this media climate.

So, what should pundits and op-ed columnists tell the American public? Firstly, and most importantly, they should say that the people cannot stick their heads in the sand and hope to return to a world before globalization. That is not going to happen. The United States needs to adapt.

In my hypothetical example, the former wine manufacturers in the United States cannot simply complain about their lost jobs - they need to learn to make computers because that is where future economic growth will be. Likewise, former computer manufacturers in France need to improve their wine-harvesting skills. These two countries needed to revamp their societies in order to become successful in a world where only one market exists. In business terms, every country has its core competencies - the products it creates or the services it provides that are better than every other country. In a one-market, globalized world, only these industries in a given country will thrive.

The country that can produce and market the best coffee will corner that market around the world. The country that can produce consumer goods in mass quantities and at the cheapest price will be the world's leader in manufacturing. The country that can provide the best outsourcing to English-speaking countries will lead in customer service and basic administrative services in that area. Competition in all sectors is now worldwide.

But where does the United States fall in such a world? I do not have a set answer, but I do know where America's future does not lie. America's future is not in manufacturing - that belongs to China. America's future does not lie in low-level administrative and computer services - that belongs to India. America's future may not lie primarily in high-finance - London is slowly overtaking Wall Street. America's future cannot lie merely in consumer spending because an economy that is based only on people buying stuff cannot last. The United States needs to ask itself: What does it do better than every other country? What can it do that no other country can?

I know that I sound like a pessimist. But I'm not. It is important to state that globalization is neither inherently positive or negative; it is an amoral process. What matters is how individuals and countries react to globalization. If a country adapts to these fundamental changes in the world economy, then it will benefit greatly. (In my example, the Americans who formerly made wine would be learning how to produce computers, and the French who formerly made computers would be learning how to make wine.) If a country sticks its head in the global sand, then it will decline economically. Every country must make a choice. If every country does what it does best, then the entire world will benefit through access to the best goods at the lowest prices.

The United States will need to make some difficult choices if it is to benefit from the new global order. However, there is little hope if the country's educational system and national infrastructure are in shambles. American high schools leave a lot to be desired. Although American universities are currently the best in the world, their American students are not learning the skills - business, science, technology and engineering - that will be crucial in a globalized world. At a time when high schools should be inspiring more students to study science, many of them are still teaching that creationism is a valid scientific theory. (India must be laughing.) In addition, the skyrocketing cost of higher education is not helping to prepare students. Most importantly, the United States needs to start teaching different languages to the next generation and educating them about various cultures and countries. Americans need to travel internationally more often. You cannot engage the world if you do not know it.

In 2002, China spent more than $200 billion on improving and modernizing its infrastructure. I'd wager that the annual amount has only increased since that time. In one estimation, China has spent roughly $1 trillion. As the Asia Times notes:

China is investing its surplus in railroad, power, road and water management in a concerted way. There is no question that China still lacks adequate infrastructure, but it has understood clearly the importance of modernizing its basic infrastructure to generate employment and adequate utilization of its vast population.

India, for its part, has been looking for $320 billion in investment to improve its infrastructure. While these countries are preferring butter to guns, the United States has done the opposite by spending a projected $2 trillion on a mistaken war in Iraq at a time when its infrastructure is crumbling and the country becoming economically unstable. Even though the future will be a digital age, the United States is falling behind other countries in broadband capacity. Globalization rewards those countries that are as lean and wired as possible.