The Costs & Benefits to Globalization
Over the long history of economies as explorers, trade, and society more generally have expanded their reach across markets, the world has trended toward a much more globalized way of conducting business. Isolationism or a nationalistic approach to an economy can have its strategic advantages, but every neighboring nation and even distant country is another market that can appeal to consumers by offering something new or simply something familiar at a better price. Given these kinds of advantages associated with an interconnected global market, globalization has been increasingly selected for over time. The market gravitates toward cheaper prices and the global market can provide that. And as if this natural force of economics produced through free and open trade wasn’t enough, the technological advancements that have helped streamline trading (like better ships and planes or more complex and efficient supply chains) coupled with the rise of affluent countries slamming the gas pedal on demand have only exacerbated that trend. Yet the world has recently found itself at a very interesting crossroad that could signal the peak of globalization is, in fact, behind us and we’re reversing course back to a less interconnected global economy. The reasons for this can be explained through many of the negative consequences of globalization as well as many recent events, but before I get into those problems motivating the transition back toward nationalistic economics, let me begin by detailing the strengths of globalization and what much of the world will be leaving behind.
THE STRENGTHS OF GLOBALIZATION
There are plenty of good reasons the world has moved toward a more globalized economy over the last several centuries and really ramped up that trajectory in the last few decades that I briefly touched on. For one, it is markets and market participants acknowledging and taking advantage of nations that can make certain goods more efficiently and cheaply than others. In a globalized economy, one nation’s cheap labor or superior manufacturing can be to the benefit of every nation through trade, which is incredibly disinflationary. Sourcing all of one's goods from the areas of the world in which they are made cheapest, naturally, leads to lower prices across the globe, especially in the United States because of the dollar’s strength. And even if domestic products are the same price as foreign ones, the quality of those foreign products can still far exceed that of the domestic ones, which gives more value for the same price, so it’s essentially the same as a selling a cheaper product. In either case, consumers are benefiting. This is because free and open markets, by opening channels to cheaper alternative markets and creating more competition, put a strong downward pressure on prices. Whether it’s through wider availability of cheaper labor, better workers, more advanced technology, or any other reason, globalizing markets is a money saver.
Another key advantage of globalization is in sourcing commodities from places with more abundant and readily accessible supplies. Every nation needs certain commodities to properly function and while many nations have all the commodities they need within their borders, few have large enough supplies or the ability to extract and distribute those supplies as cheaply as other nations. A country like Saudi Arabia, for example, can produce and sell oil for much less than other nations with smaller or more logistically challenging domestic supplies and this, too, is disinflationary. Through a global commodity market, nations can be more location agnostic when it comes to sourcing vital commodities rather than overpay by sourcing them exclusively from within their borders. However, there are a lot of countries that don’t even have the option to source certain commodities domestically, so a global market is their only option if they want to make certain goods or industries possible. Not all countries are geographically or geologically equal so globalizing commodity markets helps support unfortunate nations with cheaper prices and even fortunate countries by opening up a larger market for them to sell into.
The final advantage of globalization I think is worth mentioning is its role in geopolitical cooperation and maintaining healthy relationships with trading partners. Diplomacy and peaceful relations are much more likely when parties involved have a financial incentive to keep each other happy and that incentive is very much present among trading partners. Admittedly, this can also be damaging at times by ostensibly forcing country’s to look the other way when a valued trading partner does something deplorable (the murder of Jamal Khashoggi being a prime example), but it largely keeps the world on the same page and acting like adults, so to speak, for the sake of low prices that benefit the consumer. In the absence of vital trading alliances, countries would be far more willing to act selfishly or engage in aggressive behavior making globalization somewhat of a system of checks and balances.
So globalization, through supporting free and open trade, allows the whole world to benefit from each country’s respective expertises or geographic advantages and also plays a valuable role in keeping the peace. In other words, everyone is working as a team to facilitate the lowest prices and most efficient supply chains and nobody wants to disrupt that mutually beneficial system by stepping on too many toes. This is especially true when the division of labor prompted by globalization is such that a nation quite literally needs the global market to keep certain industries alive. That may sound ridiculous or self destructive—which isn’t necessarily the wrong take—but why make something domestically if you’re not as good at it as another nation or that nation can make it cheaper? And this brings us to the problems of globalization.
THE PROBLEMS
Perhaps the biggest problem with globalization is it creates dependencies. If one country can buy a good or commodity for considerably less than they can produce it, that disincentivizes the domestic industry around that good or commodity. What’s the point of making clothes if China makes them for half the price? Or the point of producing oil if you can always buy it for less from the Saudis? Why create an industry at home when you can use another country’s and save money? It’s these kinds of questions that lead nations to largely abandon certain industries—the path of least resistance is usually the one that saves you money. The truth is many domestic industries just aren’t profitable in a globalized world and so they simply can’t be supported absent of significant subsidies or price inflation. Even if a country really wants to keep an industry alive, if that industry can’t compete with the global market price, that difference has to be paid by someone. If it’s not the consumer via inflation, it’s the government via debt or taxation, which is really just a roundabout way of hurting the consumer again. For these reasons, we’ve seen countries time and time again choose dependency. However, major world events as of late have brought that decision into question.
RUSSIA/UKRAINE
There is an obvious reason everyone is aware of right now making a strong case for the problems of globalization and that’s the Russia/Ukraine war. Both nations are responsible for a sizable amount of commodity exports that much of the world has depended on and the war has cut off most of those supplies. To paint a more detailed picture of just how big of a deal this is, let me run off some statistics: Russia and Ukraine account for about 30% of global wheat exports; Russia, as is the biggest natural gas exporter, supplies about 24% of the world’s natural gas and about 45% of all of Europe’s natural gas; and Russia is the second largest oil exporter in the world accounting for 12% of global supply. The scary part is this is just scratching the surface. Both these nations play a huge role in supplying a long list of commodities. All the global trade and supply chains that have been disrupted directly by the war or indirectly through sanctions are leading to huge spikes in commodity prices and, as a consequence, widespread inflation, which is putting serious pressure on any and all countries that rely on either of those nations for imports. Bearing that in mind, this war has highlighted just how dependent so much of the world is on these two nations. Many countries in Africa, for example, could easily experience deadly famines this or next year because of the disruption to the wheat market. Some nations are certainly better off than others with regard to their dependency on these particular nations, but every country from the US, to China, to Brazil, to the UK—whether overly dependent on Russia or Ukraine or not—is thinking about all the ways they rely on other countries for imports and how they can fix that if and when things go south.
THE COVID PANDEMIC
As if the war in Ukraine wasn’t enough to underscore the issues with global interdependence, the world shutting down from covid shined a frightening light on any country’s trading reliances for critical goods like medical equipment. Once the pandemic hit and most of trade and international supply chains came to a screeching halt, country’s started to understand the dangers of outsourcing things like masks or really any essential products. This was painfully obvious for countries like the US when the supply of lifesaving goods were dependent on China, but it was hardly limited to just that. There’s a laundry list of goods nations almost exclusively outsource and, in the case of the US, way more than they’d probably care to admit. Knowing you rely on another country for toys or t-shirts is very different than relying on them for medicine or military equipment, but it’s all a bit unsettling and all the concerns around a future where those goods are cut off became very real during the pandemic. Prior to covid, globalization hadn’t signaled any serious warning signs, but once it did, those warning signs highlighted huge national security concerns—concerns that will only become more pressing if the world continues to fragment and the stability of trading relationships becomes more uncertain. It’s how countries will be forced to address these concerns that leads us to one of the main problems with departing from a globalized system.
SUPPLY CHAIN REDUNDANCIES
As alluded to earlier, one of the major benefits to globalization is efficiency through shared expertise, resources, and supply chains. When every country can cheaply and reliably source their goods from all over the world, there’s no need to recreate certain industries or supply chains at home, especially if they can’t match prices abroad. But when national security concerns motivate a shift toward independence, recreating all those industries or even just attempting to absorb the demand into preexisting domestic industry is much easier said than done. Not only can it take years to build out all the necessary infrastructure to support those industries, but your country may not be in a position to even execute that shift, let alone do it cost efficiently. Countries like Japan, for example, don’t have the oil reserves to support their economy even if they wanted to be fully independent. Even nations like the US that are geographically fortunate enough to have a resource-abundant homeland can’t produce certain commodities or manufacture certain goods for anything close to as cheap as international competitors, so the result would be massive inflation. If globalization is deflationary, nationalism is inflationary—which is potentially not something most consumers could bare on top of the inflation we’re experiencing already. That said, it may not be up for debate as countries will have to duplicate industries and supply chains in the face of growing geopolitical headwinds.
THE COSTS OF NATIONALISM
If geopolitical tensions continue to rise and countries—whether out of necessity or prudence—choose to duplicate supply chains and take the isolationist approach, this is probably just the beginning of the inflation to come. Any transition like this will be incredibly involved and probably not temporary by most people’s standards. In the event some countries start this transition, it will probably lead to a piling in of other countries who dare not risk being the last nation beholden to foreigners for essential goods. There’s no telling how much prices will rise and the consequences will definitely not be evenly distributed, but considering how many goods say they’re made in a country that isn’t your own, it’s likely to have a huge impact even if the price differences are small, though I don’t think they will be. Another scary element to this is weening oneself off of foreign trade isn’t some switch countries can flip overnight. It’s gong to take years and probably a lot of investment to properly build out the infrastructure necessary to absorb all the demand previously met by foreign markets and those costs will only add to the inflation problem. Countries who have built a culture around consumerism (*cough cough* the US) will be in for a rude awakening when all the goods they’ve become so accustomed to buying soar in price because they are now made domestically.
THE BENEFITS OF NATIONALISM
Now, with all this talk about the problems of moving away from globalization, let’s transition to highlighting the key advantages. Aside from promoting self-sufficiency and independence, which frees nations from conflicts of interest with trading partners and any leverage foreigners might have via a trading reliance, nationalism creates a more robust domestic economy. One of the main reasons places like the US have exported their manufacturing base and lost so many jobs is because labor arbitrage (made possible through globalization) is so profitable. But those lower prices have come at a serious cost to the US economy by hallowing out a large portion of its blue collar workforce. Transitioning back to domestically-focused production may be more expensive, but it will create more jobs and make countries more competitive in the long run. This is probably a necessity for the US if it wants to hold onto its position as the global world leader because it’s probably the only way it will be able to regain its trading edge and start offsetting its wildly lopsided balance of payments. It’s hard to say if the costs associated with bringing every industry back home will be worth it, but it won’t be for nothing and countries can at least find satisfaction in a stronger, more sustainable domestic economy.
CONCLUSION
Hopefully at this point the costs and benefits to globalization are more clear and the calculus countries are having to perform right now is a bit easier to understand. These are by no means easy decisions to make because severing ties to the global, on one end, means countries will gain crucial independence in an increasingly unpredictable world, but, on the other hand, means consumers will be paying significantly more. That could sound trivial, but prices matter a lot. In fact, the impetus behind globalization can largely be accredited to how it serves the consumer rather than the country itself. Yes, it fosters diplomacy and encourages cooperation for the sake of reciprocity—I’ll buy your cheaper oil and you’ll by my cheaper soybeans—and that is very helpful to countries, but the ultimate goal of these relationships is to lower prices—that’s the real reason countries are so drawn to world trade and the diplomacy that facilitates it. Avoiding wars and other serious conflicts is an obvious bonus, but, as usual, it’s all about the money. Globalizing trade provides undeniable conveniences and savings so it makes perfect sense that the world would attempt to take advantage of that. And in a period of peace and cooperation, globalization probably is the best approach. The issue is long stretches of good times lead people to forget what bad times are like and why growing soft and outsourcing everything is dangerous. Perhaps there is a happy medium nations will converge toward, but politics has a tendency to swing like a pendulum from one extreme to the other so we could see an aggressive reaction and return to full-scale nationalism. But regardless of what ends up happening, it’s important to know what the consequences might be and what that spells for each individual nation and the world as a whole. Globalization is both a blessing and a curse and nations all over the world are finally having to reckon with the curse side of that equation.