Introduction

With the repeated use of the term globalization in mass media the concept
has become a household word and has entered into daily vocabulary. Hardly any
day goes by without hearing something or the other about globalization.
Customarily, the term applies to economic globalization; however, it is not unusual
to talk about political (Held and McGrew, 2003), social (Craig et al., 2000), or
cultural globalization (Pieterse, 2004; and Pagano, 2007). In fact, there are indices
that compute these, as well as other globalization measures such as KOF Index of
Globalization (Dreher, 2006), to differing degrees of success. The present study
focuses on economic globalization.
Often, globalization and economic growth are used interchangeably and both
as good things to achieve. Neither, however, is necessarily good or bad without
further qualifications. For example, although a homogenous growth is considered to
be good for a country, the same is true about a non-equitable growth. In almost all
cases the economic growth is not homogenous across a nation. After all, not all
productions in all sectors of the economy can be increased simultaneously.
Therefore, economic growth usually begins in few segments of the economy.
Although any growth is good for the country, nevertheless, an uneven growth can
and will create resentment in different parts of the country by increasing income
inequality and widening the gap between the rich and the poor. If the economic
growth occurs along the ethnic lines, the outcome is potentially more dangerous,
and the possibility of emergence of ethnic conflict or worsening of an existing one
would increase. Even trade can be a source of conflict and war (Martin et al., 2008).
The analysis of the impact of globalization is the focus of the present study.
The goods and bad about globalization
The outcome of free trade is that at least one and usually both trading
partners gain. Total outputs of all traded products exceed the combined pre-trade
levels of both partners and, some resources are freed from production of the traded
goods, which can be used in other sectors of the economy. This process of freeing
resources is at the heart of the resistance to free trade and globalization. To make
the case more general and to also demonstrate the principle of comparative
advantages, assume that the U.S. can produce jet planes and textile more efficiently
than Mexico. In other word the U.S. has an absolute advantage in both goods over
Mexico. For simplicity and clarification we assume either there are no other goods or
they are irrelevant for the present argument. The presence of absolute advantage in
U.S. means that an average group of U.S. workers, say 1,000 workers produce more
jet planes or textile than an average group of 1,000 Mexican workers, other things
equal. At first glance it seems that there is no point for the U.S. to trade or any
possibility for Mexico to export anything to the U.S. Let us further assume that the
U.S. has comparative advantage in the production of jet planes. Mexico, although
not as productive as U.S. in either textile or production of jet planes, nevertheless is
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much better in producing textiles compared to jet planes. Therefore, the U.S. has a
comparative advantage in production of jet planes while Mexico has a comparative
advantage in production of textile. Consequently, it would be better for the U.S. to
produce more jet planes than necessary at the going price for domestic
consumption and export the excess to Mexico. On the other hand Mexico should
produce more textile than the domestic demand and the prevailing price indicate
and export the excess to the U.S (Kreinin, 2008).
While the logic is simple and easy to follow, the mechanism is far from being
simple. When the U.S. decides to produce more jet planes where do the raw
materials and components come from? It might be argued that all the U.S. has to do
is make more of all the parts that are needed to produce the additional jet planes.
How about the labor? Where does the labor come from? If there were an excess
capacity of qualified jet engineers, mechanics, and other necessary workers then
the result of increase in production would have been a reduction of unemployment
in the jet plane production sector. To be more realistic let us not assume there is a
readily available excess supply of workers in jet plane production. In other words,
that sector of the economy is not experiencing any unemployment. Without
unemployment the increase in demand exerts an upward pressure on wages for all
the workers in jet plane industry. As the wages increases, workers in related or
closely related industry are attracted and begin to switch to jet production. If there
are no closely related industries and if quick re-training is not possible then the
wages will remain high and the production cost will be excessive and the nation
might lose its comparative advantage. Suppose the (majority of) workers switch
from the auto industry. This will create a shortage of autoworkers. The shortage of
qualified workers in the auto industry will increase the wages to attracting workers
from other sectors. The cycle will keep continuing until enough workers have shifted
around and changed their jobs to meet higher demands for workers in all the
sectors as workers move to higher paying jobs. Of course the process is slow and
time consuming. It may take up to five years for the cycle to complete. The process
will also impact college and technical school enrollment for obvious reasons. The
above argument still has one major flaw, unless there is unemployment in the
country in some sector where the workers come from. The above argument
indicates that workers keep changing their jobs from lower paying jobs to higher
paying jobs but it does not indicate any additional workers are brought into the
system. The same trickledown effect will take place in the capital market. Capital
will be shifted from investments with lower rates of return to those with higher
returns as more jet planes are produced for export purpose. However, the capital
movement is usually much faster than the labor movement.
A similar chain reaction will take place in Mexico. However, the engine there
is the textile industry. As the production of textile increases to meet the export
demand the demand for labor and capital in textile industry increase. The wages
and rates of return to capital increase in the textile industry and through the
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trickledown effect it will spread to the rest of the economy increasing both wages
and return to investment in sector after sector. The issue of additional workers and
capital needed for the production of exported goods remains a puzzle for Mexico as
well. Where do all the extra workers and capital come from?
To answer to the question where the resources necessary for expansion of
goods and services that are exported come from we need to study the negative
effects of international trade and economic globalization. In order for foreign goods
to have a market they must either have a better quality or lower price after
transportation, insurance, marketing, and negotiation costs are added in the final
price. Imported goods by virtue of having better quality/lower price replace
comparable domestic goods and services. The price of competing domestic goods
will fall due to lower demand. Even if the entire industry is not destroyed, lower
prices translate into reduced production, which require fewer workers, less capital,
and reduced input. As the demand for workers, capital, and other input declines in
the industry that faces foreign competition, their prices, namely wages, rates of
return, and resource prices decline. Some of the workers and capital will be
unnecessary and have to leave, creating unemployment and unused capital. These
excess capital and unemployed workers provide the capital and labor needed for
the expansion of the export sector. It might be easier to think that the capital can
shift from one sector (import) to another (export) but the trickledown mechanism
explained above must take place over time until the economy reaches a new
equilibrium. For example the textile industry in the U.S. has to lay off workers and
close textile companies in the face of Mexican textile imports.
Trade has losers and winners. The winners are workers and investors of
exported goods, plus the consumers of the imported goods. In the export sector the
few gainers pocket all the gains from exports. They, plus politicians, showcase the
creation of new jobs, factories, and additional tax revenues. They are usually highly
visible and lobby in favor of trade. The consumers of the imported goods are
numerous and each gains a small amount, sometimes even negligible. They are
seldom heard and are unorganized as a group. The losers of trade are the workers
and producers of the goods that compete with the imports. The winners are millions
of consumers that pay lower prices for the same or possibly better-quality products.
While the latter usually does not organize the former is usually very organized and
vocal. In fact, the losers of trade, and their supporters, are much more vocal than
the winners from trade. The politicians, especially the challengers, always root for
the losers of the trade. In the primary elections of 2008 even Senator Hillary Clinton
told the workers in Ohio and Indiana that certain provisions of NAFTA are not good
for the U.S. and need to be changed.
There are at least two major viewpoints about the effects of globalization.
One group, the realists, argues that the power struggle among states and their
policies is the source of globalization; the other group, the Marxists, attribute
globalization to the forces of capitalism and class struggle (Cohn, 2008: 97).
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Sometimes when one listens to these groups it seems as if globalization is a

deliberate and concerted effort in order to bring more supremacy to powerful
players of the developed world. According to Scholte (2005: 128-130) both Marxists
and liberals acknowledge the importance of technology in the expansion of
globalization. The main difference is their orientation. The former attributes it to the
capitalist movement, while the latter believes that the driving force behind
technological advancement is the desire for economic development. The present
work has chosen a more benign approach to the issue. This view, in part, is due to
the working definition of globalization adopted here. Namely, the degree of
globalization is measured by the ratio of total trade to GDP. The trade-based
definition of globalization and economic analysis of globalization from the costbenefit analysis of international economics is different than the views of the liberals
and the Marxists. According to Cohn (2008: 97) In terms of effects, historical
structuralists agree with liberals that globalization is a significant, pervasive force;
unlike liberals, they view it as a highly negative process that prevents states from
safeguarding domestic welfare and employment. From this perspective a job lost to
globalization is a job loss. From the international economics perspective and net
trade viewpoint, a job loss (in the sector competing with import) is replaced by a job
creation (in the export sector) and then some. It is not customary to count the net
job loss or gain; nevertheless, the society as a whole obtains higher productivity, at
least in terms of GDP gains as a result of free trade. Care must be taken to avoid
comparing the welfare loss of the gainers, both from imports and exports, with the
gains of the winners, both from exports and imports. There is no mechanism for
such comparisons in economics. Another advantage of using a trade-based
approach to economic globalization is that the free trade enables nations to reach
equilibrium that in Samuelsons (1939, 1962) words would be Pareto non-inferior.
The challenge of globalization
Since other factors influence globalization, changes in their structures and
formats will change the components of their contributions, which will affect the
trends in globalization. These include production technology, transportation
technology, division of labor, national security, and the standard of living. As time
goes by the technology improves in all frontiers. Technological advances lower
production and transportation costs. These facilitate and improve international
trade and, hence, globalization. On the other hand, due to increased demand for
fossil fuel, its price has been increasing much faster in the recent years and the
forecasted trend is that will continue to increase in the near future. This should
reduce globalization as was witnessed in the years past the oil embargo of 1973.
The potential negative impact of cost of fuel increase on globalization is much
greater than the positive but gradual increase in the service sectors of the global
communities. This outcome ignores the possibility of technological advances in
fossil-based transportation as well as non-fossil-based transportation. With each
technological advancement, the transportation cost decreases, and reduced cost
4

induces a gradual increase in demand, which over time results in higher

transportation cost. The cycle repeats. These are the only certain predications that
can be made about the future trend of globalization. Any prediction beyond these
facts would be purely speculative. There is no guarantee that tariffs will continue to
decline. Nations have lowered and raised tariffs due to political and social pressures,
both real and perceived. There is no assurance of continued and timely advances in
transportation technology. After all, the price for transportation, like any other
commodity, is based on both the supply and the demand for it. In fact the totality of
all the forces that influence international trade, from the extent that countries can
cooperate to productivity to transportation cost have created the globalization
cycles throughout the history of mankind and will continue to do so. Until the time
that all the nations are able to abolish borders and other barriers to trade, the world
will witness trade cycles and, hence, globalization cycles. Each cycle will have its
own forces that determine its starting point, the rate of expansion, the point of
decline, the rate of decline, the end of the cycle, and the birth of a new cycle. Based
on the recent events, the future of the current globalization expansion is not
promising. The rapid increase of the price of oil during the 2008 has increased
transportation costs substantially. Although until recently the real price of oil
(inflation adjusted price) was substantially lower than the real price of oil in 1973,
the gradual increase in oil prices has taken its toll on transportation. Higher
transportation costs adversely affect economic globalization. As soon as pertinent
statistics become available, it will be seen that the rate of globalization has
declined. It is possible that globalization continues to grow for a while longer but,
without a doubt, the rate of growth will continue to decline as long as the oil prices
increase. It is difficult to forecast when globalization will stop since the economies of
the world have not had a chance to fully respond to the external shock of increased
oil prices. Furthermore, the oil prices and, hence, transportation costs are still
changing rapidly and it is not clear what their long run equilibrium prices would be.
Conclusion

There have been three rapid economic growth and three rapid globalizations
in the last two centuries. Globalization has losers and winners. The former consists
of workers and capital owners that compete with the imported goods and services.
It also includes all the consumers of goods and services that are exported. The
latter consists of workers and capital owners that produce exported goods and
services. It also includes all the consumers of goods and services that are imported.

The current globalization will end like all the previous ones. Although in many
regards, such as percentage of total trade to GDP, the present globalization is not
any bigger than the previous two, however, it has affected more countries than the
5

previous globalization waves. The current decline of the U.S. economy plus the rapid
growth of oil prices might bring this globalization wave to a quick end. Only the
continued growth of emerging economies can save the current expansion. If
emerging economies continue their expansion and increase their globalization
before long the economic geography and the dominant players of the world
economy will change drastically.

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