Globalization (2008)

Globalization: Is It Good or Bad?

Shahdad Naghshpour
The University of Southern Mississippi
730 East Beach Boulevard
Long Beach, MS 39560


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. What is globalization and how is it measured? What are its consequences? Is it good or is it bad? A comprehensive discussion of all types of globalization, even in the context of the above four areas, is beyond the scope of this study. 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.

On the other hand, globalization and economic growth are not disjoint. In fact, economic theory demonstrates that globalization, as is defined in this paper, results in economic growth and an increase in the welfare of a nation. The most common measure of economic growth is GDP per capita. GDP represents the annual market value of all final goods and services produced in a country. The expenditure approach to measurement of GDP clearly indicates that an increase in exports increases the GDP (McEachern, 2006).

A common misunderstanding is the belief that the present globalization is a new phenomenon. In fact, in the last 250 years there have been three globalization waves. There have also been three periods of substantial growth since 1850. The first growth spur occurred between 1850 and 1914. Annual growth rates were very high during this period, especially for those countries that are now considered developed or industrialized nations, such as England, Germany, and France. According to O’Rourke and Williamson (1999) the main sources of growth during this relatively long period was transportation and communication.

During the two World Wars, and especially during the decade prior to the Second World War, the world economy suffered substantially. Obviously, the worse happened during the great depression in 1929 and the years that followed. The economic recovery did not take place until after World War II in 1945. During this period the United States of America emerged as a leading economic and military power and has dominated the world since then.

The second rapid economic growth period of the world began immediately after WWII with the world following the footsteps of the USA. The consensus is that this period of exceptionally rapid economic growth came to end in 1973 with the Arab Oil Embargo, which resulted in a substantial increase in oil prices. Once again the world economy suffered. Although due to a built-in stabilizing mechanism (Egle, 1952) imbedded in the economic systems of major industrialized countries, and with interventions from respective central governments, the world did not witness another “great depression”. Nevertheless, the productivity suffered substantially, and the output almost became stagnate. An important consequence of this slowdown pertains to less developed countries. However, the discussion is beyond the scope of the present study. Interested readers should consult Reynolds (1983), who addresses the consequences of this slowdown for developing countries. A new era of growth began in1990s. The fuels for this third round of rapid growth are information technology and economic freedom. According to a Wall Street article this new growth is more encompassing and includes numerous developing countries (Wall Street 1997).

Globalization Waves

It would be naïve to think that globalization is a new phenomenon. As demonstrated above, there have been several periods of rapid growth in recent history alone. Adopting the globalization definition based on total trade (see the next section) means that there have been numerous globalization cycles as well. According to Halliday (1999) and Rothschild (1999) globalization cycles stretch to the ancient civilizations. Other researchers, using different definitions and interpretations, have also concluded that there have been frequent globalization cycles. Some, such as Bisley (2007: 34-35), count the colonial expansions of Europeans in Africa, Asia, and America during the 16th-19th Centuries or the expansion of Islamic caliphate between the 8th-13th Centuries as periods of globalization. In our opinion these are land conquests and should be treated differently than globalization, which is based on trade, or according to some based on technology and information. Obviously, there is little resemblance between the present globalization and colonization of Africa by European military powers. At least one major difference stands out. In the above mentioned cases, military expansion and land conquest proceeded economic and trade expansion. In neither case the relation was voluntary, as it seems to be the case in the more recent trade-based globalizations. Even he agrees that the present globalization is different (Biesly, 2007:37). On the other hand others believe that when percentages are used, the present “globalization” is actually either similar (Bordo et al., 1999) or a continuation of the golden age era (Schwartz, 2000) of the late 19th and early 20th Centuries (Sachs and Warner, 1995; Rodrik, 1998).

The first wave of modern globalization started around the Industrial Revolution and lasted until the French Revolution and the Napoleonic Wars, Hobsbawn (1954). Lots of important things occurred during this period, such as the Industrial Revolution and the massive colonization of Africa, Asia, and America by European powers. The second globalization occurred somewhere around the last quarter of the 19th Century and lasted until the eruption of World War I in 1914. In many regards this globalization was more intense than the current one. The capital flow was as high as 3.9% of GDP, as compared to 2.3% in mid 1990s. Others provide more detailed comparisons and, hence, are not repeated here (Bairoch, 1993; Frankel, 1993; Taylor, 1996; Obstfeld, 1998). It suffices to say that the era was marked by great improvements in communication and greater trade.


It is time to provide a formal definition for globalization. A useful approach is to link globalization to trade. The percentage of a country’s production that is consumed in another country (export/GDP) can be used as a measure of globalization (Dunn, 2001). The percentage of a country’s total consumption that is produced in another country (import/GDP) is another measure (Sawyer and Sprinkle, 2008, 5). Instead, the portion of total trade as a percentage of GDP can be used ((import + export)/GDP)*100). This measure is used to gauge the level of international openness.

This definition does a fairly good job in gauging economic globalization. However, like any other measure, it is not perfect. It might be negatively biased for larger economies. While the ratio is above 100% for 11 countries (it is 462.9% for Singapore), and is above 50% for another 26 countries, it only measures 26.6% and 23.4% for U.S. and Japan, the number 1 and number 2 economies of the world (Table 1).

Table 1. Trade as Percentage of GDP

CountryPercentage of GDPCountryPercentage of GDPCountryPercentage of GDP
Hong Kong343Costa Rica96Israel78

Alan Heston, Robert Summers, and Bettina Aten, Penn World Table Version 6.2, Center for International Comparisons of Production, Income, and Prices at the University of Pennsylvania, 2006.

Globally, total trade was about 47.3 percent of the world output. This is about twice as high than the value in 1950. In the case of the U.S., however, the ratio is at its highest for over 150 years, but U.S. ratio has been historically low. The lowest numbers are for the late 1930s and early 1940s, around 8-9%. This is not as much due to lack of trade as it is due to the size of the U.S. economy. In fact, in 2005 U.S. exports were the second highest in the world, slightly behind Germany (Table 2).

Table 2. 2005 Exports by Country in Millions of U.S. Dollars

U.S.693860Saudi Arabia73,940
Hong Kong201,150Poland41,010
Korea162,470Czech Rep.38,403
Spain119,131South Africa29,723

Source: World Bank, “Table 4.5 Structure of Merchandise Exports,” World Development Indicators, Washington, D.C.: World Bank 2007.

In fact, Dunn (2005) uses a method similar to the above measure as well as three other measures to conclude that the U.S. economy has not really globalized. Since the present time represents the highest ratio of total trade to GDP, the conclusion is that the U.S. has never been globalized according to Dunn. Of the top 10 “globalized” countries (Table 1) none is considered very large. Dunn continues to point out that the relatively small total trade percentage for U.S. is in spite of the fact that the average tariff rates for the U.S. have dropped from a high of 44.9% in 1870 to as little as 2% in recent years. In fact, “A recent statistical study by the U.S. International Trade commission concludes that, if this country were to remove all of its remaining statutory import restraints, total employment losses in import-competing sectors would be only 135,000 jobs. This is less than the number of new jobs created in this country in a typical month in the recent boom.” (Dunn, 2005 413). With the possible exceptions of the U.S. and Japan, the above trade to GDP ratio is a reasonably good measure. Of course if one agrees with Dunn, then U.S. is not even globalized.

Other definitions of globalization are closely related to economic and international trade. Acocella (2005) defines it “…as expansion on a global scale of the interrelations among national economic and social systems through private economic institutions. Such expansion is associated with the increase in international movements of goods, ‘financial’ capital and labor (shallow integration, in the terminology used by UNCTAD, 1994) and with an increase in international production, mainly by multinational corporations (deep integration).” He adds that “By ‘financial capital we mean international capital movements different from FDI, which supports ‘deep integration’ …”

Why Nations Trade

Since the time of Adam Smith, economists have provided numerous trade theories. Each generation of trade theories has overcome the shortcomings of the previous theories and also has addressed the new realities of its time that could not be explained before. Overall, even the earliest theories have done a fairly good job explaining the reasons for trade. The answer to the question “why nations trade” is simple and does not require any knowledge of economics. In this regard their behavior is not different than the behavior of individuals that engage in exchange. Nations engage in trade because it helps them to improve the living standard of their citizen. The answer that is usually given to this question however is really the answer to the following question: What are the requirements for nations to engage in trade? Nations engage in trade when there is a difference in the endowments of natural resources, when there are absolute advantages for producing different goods and services in different countries, and when there is a comparative advantage in production of goods and services (Kreinin, 2008).

It is easy to demonstrate that the existence of comparative advantages is the necessary but not the sufficient condition for starting trade. Necessary condition means that if the condition is not met, the event, in this case trade, will not take place. In other words if two countries lack comparative advantages in production of at least one good or service they will not engage in trade. Note that when there are no comparative advantages between nations there are no absolute advantages either. The sufficient condition indicates that the existence of the “necessary” condition does not automatically or inevitably result in trade. The sufficiency condition depends on political atmosphere and the nature of the relationship between countries with comparative advantages. If the political, ideological, or religious differences prohibit trade between countries with comparative advantages they will not trade.

There are two other factors that might hinder trade. If the comparative advantages are small and the distance between the countries is long it is possible that trade does not take place because the cost of trade exceeds its benefit. Of course if better terms of trade could be obtained from other countries, regardless of the degree of comparative advantage, then the trade will flow to and from the countries that provide the greatest benefit.

The Effects of Globalization

If there were any doubts about the benefits of trade, David Ricardo’s analytical proof shattered them. Of course humanity had discovered the benefits of the trade long before Smith and Ricardo or any other economists and intellectual scholars ever argued in favor of trade. From the dawn of civilization and ever since, there were two human societies in separate geographical regions where trade took place. As long as one or more persons in one community had more of something and fewer of another thing there has been a potential for trade, and in many instances trade took place. In simple cases the potential benefit is very obvious. One region has lots of corn, the other can produce better pottery, and the law of diminishing marginal return (Ferguson and Gould, 1975) indicates that the greater consumption of any product reduces its marginal utility. Sooner or later the marginal utility of consuming corn is going to be below the marginal utility of having pottery in one community, while the opposite will take place in the other community. By exchanging the product with a lower marginal utility with the product with higher marginal utility both communities will gain and improve their standard of living as well as their welfare.

Trade will take place and improve the welfare of the trading partners even if the above absolute advantage does not exist (Kreinin, 2008). Although people, communities, and nations have traded for centuries and, in spite of the fact that the economic theory proves the advantages of trade, it is not clear why some people and sometimes nations oppose one or another type of trade or the trade itself altogether. In 2008 during the primaries all three leading candidates, at one time or another and to differing degrees have advocated a reduction or limitation of foreign trade, especially as it is conducted through the rules and regulations of the North American Free Trade Agreement (NAFTA) and always without any exception to the cheering of the audience. Earlier in 1999, the World Trade Organization convened in Seattle U.S.A. to launch the new millennium discussion of world trade citizens and organization that opposed the expansion of trade, and the resulting globalization conducted demonstrations which eventually broke into riot. Obviously the issue is not that Americans, even American politicians for that matter, are not capable of comprehending the advantages of trade. It is not true either that trade or at least NAFTA is not advantageous to one country, namely the U.S. The problem is deeper than that.

The arguments in favor of trade, and hence globalization are based on macroeconomics. Trading partners replace goods and services with lower marginal utility with goods and services that have higher marginal utility. The exchange continues until the marginal utility of traded goods become equal to the marginal utility of all other goods per dollar’s worth. In order for this argument to be valid the valuation must, and indeed does, include transportation, insurance, and all the other costs, including the cost incurred negotiating.

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 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 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.

It is important to understand both aspects of the international trade. On one hand it creates new jobs; however, on the other hand it destroys domestic jobs. The important question is whether the net result is positive or negative. International economics (Kreinin, 2008) proves that the net result is a gain. Nations that engage in trade enjoy increased overall production and per capita GDP. The more detailed result of trade follows. We have already seen that the sector competing with imported goods and services is the losing sectors. Its return for capital declines, forcing investors to find alternative investments. Workers are laid off and at least in the short run become unemployed. Depending on skills and age, some of the workers may never find another job or never get the same wages as they were before the invasion of the imported goods or services. These (relatively few) workers and investors pay the price of trade and suffer substantially. As a result of lower price or better quality of the imported goods and services consumers of those goods achieve a higher standard of living. Millions of people gain while a much smaller number of people lose. The exact amount of gain per person depends on particular goods and the amount of price reduction. It is even more difficult to measure the gain if the main impact of imports is better quality. It is possible that at least some gainers from imports not notice the difference. Overall, the gain is very small for each individual but affects many. On the other hand, the loss is bestowed on few but the individual loss can be devastating, such as when a laid-off worker cannot secure another job.

At the exports sector from the producers’ perspective, the higher demand, domestic plus foreign, results in a higher return for investment, higher wages, and greater demand for resources. Consequently, initially, the unemployment (if any) in the sector will reduce. Next, resources start to flow into the export sector from less productive sectors and the trickledown begins its process. As part of production is sent overseas as export, the domestic price of exported goods begins to increase. The consumers of these goods, facing higher prices, have to curtail their consumption. Depending on the price elasticity of demand consumers may expend more, the same, or less on these goods. Regardless of how much the overall expenditures are the result is a loss of welfare to domestic consumers. They have to either spend more for less consumption or have to adjust their consumption habit by substituting less desirable goods. Therefore, as a result of export the production side of the export industry (workers, investors, suppliers) all gain and gain substantially. The entire benefits from trade will fall on these, relatively few gainers. On the other hand, the losers are in millions, each losing a small amount. They are unable to organize and protest; therefore, many of them may not even notice any major welfare loss as individual losses are relatively small. The gainers and politician tend to showcase the gains in exports, job creation, and new factories.

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.

Other Views of the Effects of Globalization

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). 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 cost-benefit 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 Samuelson’s (1939, 1962) words would be “Pareto non-inferior.”

Prebisch (1962) questioned the general idea of universal usefulness of free international trade. He pointed out that over the course of years the terms of trade have declined for less developed countries. He pointed out that the demand for primary goods is more or less income inelastic. Therefore, as nations develop and their income increases, the demand for primary goods remain virtually unchanged. On the other hand, the demand for finished or manufactured goods is income elastic; as income increases demand for these goods increases. The less developed countries produce and export primary goods while developed nations manufacture and export finished goods. Consequently, the terms of trade are constantly improving for developed countries and deteriorating for less developed countries. His views are not far from reality. Stieglitz (2007: 75) points out that “GATT focused on liberalization of trade in manufactured goods, the comparative advantage of the advanced industrial countries. There was limited trade liberalization in the areas important for developing countries, such as agriculture and textiles. Textiles remained subject to strong limits (quotas) on a country-by-country, product-by-product basis; likewise, agriculture remained highly protected and subsidized.” Subsequently, Prebisch prescribes an “import substitution industrialization” policy. The policy recommends trade barriers to protect manufacturing industries during their infancy (Prebisch, 1962). In the 1950s and 1960s several less developed countries adopted Prebisch’s recommendation and raised trade barriers, especially for manufacturing sector. The result was a boom in manufacturing of mostly consumer goods. Unfortunately, and some argue as a results of strong barriers to entry and hence lack of competition, the output were of inferior quality. More recent right-wing economic development specialists recommend an “export oriented” industry and cite the success stories of countries such as Taiwan, South Korea, and Singapore (Amsden, 2001). Amsden, at least in part, is in agreement with the realists such as Katzenstein (1976) and Weiss that the state plays a major role in international trade and , hence, globalization. On the left, the followers of the dependency theory argue that developed nations would never allow less developed countries to become developed. Consequently, they advocate socialism as the correct path (Love, 1990). The same group even advocates a reduction of contact with the “North” to reduce the harmful effect of trade dependency. These counter arguments point out to the fact that there is a possibility that the trade liberalization and globalization might not be in all parties’ interest.

What is the future of Globalization?

Like many other phenomena with cycles, globalization will go through another cycle. The question is not whether globalization will decline or at least slow down. The question is when it will decline and how much. An interesting question would be whether or not the decline would be the same for all countries. An equally interesting question would be which countries would experience the decline first.

It might be easier to answer the question if one looks at the U.S. economy. One reason for a smaller share, as a percentage, for total trade in the U.S. economy is the magnitude of the service industry. The service sector is much larger in more mature economies than in the lesser developed countries and it is the fastest growing sector of the developed nations. The “products” of the service sector are usually produced and consumed at the spot and are less tradable across the boundaries of nations. An obvious and a major exception of course is the financial and insurance services. Acocella (2005) points to another matter: “…since GDP is a measure of value-added; while exports and imports express the overall value of goods and services, the ratio of international trade to GDP tends to overstate international integration to an increasing degree as the division of labor increases.” Therefore, the division of labor in developing and possibly in developed countries increases the GDP while at least in developed nations the result would not be a proportionate increase in international trade. Thus, as nations become more advanced the rate of globalization should decline, other things equal. Simultaneously, as the service sector grows, the GDP, the denominator of the ratio of trade to GDP, increases while the numerator does not necessarily follow since services are less tradable in international markets. Consequently, the rate of globalization should decline or at least slow down as the service industry grows, other things equal.

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 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.

Another view that indirectly predicts the decline of globalization is based on hegemonic stability theory. This theory ascertains that globalization increases during the existence of a single powerful hegemonic nation. Arguably, that nation was Britain during the 19th century and the U.S. in the 20th century. Huntington (1999) predicts that the U.S. hegemony will end since the “free riders” receive the same benefit from free trade than the hegemonic because they do not have to pay for it.

A very important issue that seldom draws any attention is the fact that the nature of trade has changed. During the GATT era the emphasis was on removing trade barriers for manufactured goods. The industrialized world had a comparative advantage in manufactured goods and, by managing to remove or reduce barriers to their trade, developed countries improved their terms of trade. This resulted in temporary withdrawal of some large third world countries such as India and Brazil from world trade. However, the dominant sector of developed countries is not manufacturing any more. Today, the beneficiaries of the removal of trade barriers are the emerging economies. For these countries, such as China, India, and Brazil, manufacturing is the engine and the trade is the fuel for growth. In light of this new development, it is interesting to see what the developed countries will do. Obviously, they will continue to advocated free trade in service industries such as insurance, transportation, and banking. In fact the U.S. has been pressuring China and even Japan to open up their markets to U.S. insurance companies. It is more interesting to see what will happen to the free trade in the manufacturing sector. Reaction to rapid growth of countries such as China, India, Brazil, and possibly Russia, might start a chain retort of trade barriers against manufactured goods. A prelude of this was evident in the Uruguay Round with increased pressure on new rules and obligations on intellectual property rights, investment, and services in return for some promises about reduction of tariffs on textile and agricultural products. The riot in Seattle, in part, was a response to this unfair treatment.


The present paper reveals that there have been many globalization cycles throughout the history. 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 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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