'I believe that globalisation - the removal of barriers to free trade and the closer integration of national economies - can be a force for good and that it has the potential to enrich everyone in the world, particularly the poor. But I also believe that if this is to be the case, the way globalisation has been managed, including the international trade agreements that have played such a large role in removing those barriers and the policies that have been imposed on developing countries in the process of globalisation, need to be radically rethought.' (Joseph Stiglitz, Winner of the Nobel Prize for Economics 2001)
The following assignment gives you the opportunity to examine some of the issues raised in the above quotation, namely why most economists are in favour of free trade and economic integration and why, despite this, the world is still some way from achieving this outcome.
1. Explain, using appropriate economic concepts, why most economists believe that free trade and the abolition of protectionist measures are welfare enhancing. (30 marks)
2. Explain why, despite the arguments presented in 1. above, the most recent round of trade talks (The Doha Development Round) ended in failure with many trade barriers continuing to proliferate. (30 marks)
3. One of the major criticisms of globalisation is that growth in trade is bad for the environment. Using appropriate economic concepts, evaluate this argument. Is there any evidence to support it? (40 marks)
Globalization, free trade and the removal of protectionist barriers are three economic concepts that come hand in hand. The definition of globalization is 'the development of the world into one market place' (Grant 2003) and the way this could be achieved would be by the removal of protectionist measures such as quotas and tariffs, to create free trade between all countries. In this assignment I will look at why globalization is in economic theory a fantastic idea, but in the real world fails to deliver the benefits for all anticipated by economists.
The fact that in theory globalization would be a good thing is one of the least contested economic arguments of our time. In theory if the barriers to free trade are removed and the world moves towards becoming a global economy there should be many benefits. One of the first ways these would occur would be from the increased competition between firms. If firms are operating in a global market then there will be more alternatives from consumers to purchase.
This in theory should mean that un-productive and wasteful firms are forced out of business, while the firms who remain are made to increase their productivity. The end result of this process ought to be lower prices for better quality goods as the market becomes more streamlined. Coupled with this point is the supposed increase in technology that operating in a global market ought to lead to. As there are no barriers and hopefully much more information sharing the rises in productivity should come quickly to all the markets without the threat of increased competition.
Another major benefit that globalization should bring to global welfare would come from the idea of comparative advantage. Comparative advantage is one of the main economic concepts linked to globalization and is defined as; the ability to produce a product or service at a lower opportunity cost than other regions or countries. (Sloman 2006) One of the main ways the use of this comparative advantage has been affected by globalization is that Newly Industrialised Economies (NEI's) are gaining a comparative advantage in manufacturing industries, as they take advantage of the increased technology mentioned above. As these countries have large supplies of low skilled labour their wage rates are lower and so they can produce the goods cheaper.
This change in where goods are being produced has been very prominent in the textiles industries, where big multi-national companies such as Nike are shifting much of their production to the Far East Countries like Thailand and Cambodia, where the costs of production are much lower.
Although some commentators have expressed worry that this shift in production will lead to more un-employment and a fall in wages in the industrialised world I do not think this is the case. In fact I believe that although industrialised countries will lose market share in manufactured goods this will be countered by increases demand for more highly skilled labourers. The UK is a prime example of this as although the number of jobs requiring low skilled workers is falling, the number of jobs for high skilled workers (such as financial advisors and business services) is actually rising.
So instead of the total demand for British goods falling I think in fact it will just shift toward more tertiary industries. The end result of this double edged process should be that the total output of the world economy will rise and this in turn will cause standards of living to increase across the globe.
The last important way that globalization ought to increase welfare across the globe is linked to the first point and is that consumers will get higher quality products for lower prices as productivity rises. This should mean that people will spend their income on products and so with use of the multiplier effect, more people will have more money and in theory aggregate demand and thus standards of living should rise across the globe.
Although the theory stated above makes it sound like there are no faults with Globalization and the removal of trade barriers, protectionism still occurs for a number of reasons. The real reason behind this is that if everyone across the globe was to remove trade barriers then everyone should benefit, for an individual state however, if they remove trade barriers and other states don't follow cue then they will be left in a weakened economic position, whereas if other countries remove their trade barriers and a state keeps its own it will gain some major economic advantages.