An Economic Education Newsletter from the Federal Reserve Bank of St. Louis
The Globalization Debate
Inside the Vault—spring 2008
Crossing Borders: The Globalization Debate
As published in Inside the Vault, Volume 13, Issue 1, Spring 08 lobalization can be defined as a phenomenon of increased economic integration among nations, characterized by the movement of people, ideas, social customs and products across borders. This phenomenon has a long history, dating back to the trade routes developed during the Roman Empire, as well as those pioneered by Marco Polo or ocean voyagers like Columbus and Magellan. Globalization has been crucial for economic growth over time. In his influential study “The World Economy: A Millennial Perspective,” the noted economic historian Angus Maddison argued that economic advancement across time was sustained by three interactive processes: t • heconquestorsettlementofrelativelyemptyareasthat had fertile land, new biological resources or a potential to accommodate transfers of population, crops and livestock; • internationaltradeandcapitalmovements;and • technologicalandinstitutionalinnovations. As Maddison and others have noted, technological innovations have played a key role in spurring previous globalization episodes. Transfers of technology from Asia and Egypt—such as silk, spices, textiles, glass blowing and rice—helped Venice and its colonies play a key role in the development of Europe. As economic integration spread across continents, political and financial institutions evolved to enhance and regulate the global marketplace. The current globalization period, which more or less began in the late 1960s, contains many of the same aspects of earlier episodes. Reduced transportation costs, the opening of new International Trade Exposure: United States and the Rest of the World World except U.S.
% of GDP
80 70 60 50 40 30 20 10 1975 1980 1985 1990 1995 2000 2005
markets (such as Asia, Eastern Europe and South America), and the general lowering of tariffs worldwide have helped boost international trade as a share of domestic economic activity. A key development behind the current globalization wave is the revolution in information and communication technologies (ICT). Although shipping merchandise goods is still the dominant form of trade between countries, trade in services that takes place across transoceanic cables or by satellite is of increasing importance. The increased openness of the United States and the rest of the world to international trade can be seen in the figure on this page, which shows the sum of imports and exports of goods and services as a share of all goods and services produced annually in the United States—a figure known as Gross Domestic Product (GDP). Whereas the U.S. share of trade is a littlemorethanaquarterofGDP,therestoftheworld’sexposure to international trade is much larger: 70 percent.
The Benefits of Globalization
The benefits of globalization are essentially based on the benefits of free trade. International trade is beneficial because 2 Continued on Page 3
NOTE: Trade is the sum of merchandise and commercial services imports and exports. SOURCES: World Bank World Development Indicators and author’s calculations
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Inside the Vault—spring 2008
of the principle of comparative advantage, which allows a country to specialize in the activities that it does best, given its labor, natural resources and technology. The estimated net benefits that flow from free trade are substantial. According to a study by economists Bradford, Grieco and Hufbauer, international trade has increased real household income by between $7,000 and $13,000. Removing all existing barriers...