On Misconstruing Globalization

By Jock O'Connell

Editor’s note: Since May is International Trade Month, Comstock’s Business asked Jock O’Connell, the Sacramento-based trade consultant, to comment on five of the more prevalent misconceptions about international business and globalization.

International trade is no place for small business. Those gargantuan, multinational corporations that the anti-globalization crowd warns are leading us to hell in a shopping cart? Well, they really do dominate the international trade. They are indeed the principal agents of globalization, spreading goods, services, technologies and capital throughout the world. Here in the U.S., firms employing more than 500 workers account for 70% of the nation’s exports of goods and services and earn even more from the activities of their overseas subsidiaries. But so what! At last count, there were more than 210,000 exporting companies in the U.S., and obviously few of them numbered among the Fortune 500. More to the point, small and medium-sized American firms were responsible for nearly $300 billion in exports last year. That’s as much as the entire nation was exporting as recently as the 1980s.

Exports are good; imports are bad. Probably most folks would instinctively agree with this proposition, even though most economists see it as a regrettable vestige of mercantilism, an economic doctrine that celebrates the joyless hoarding of capital. In democracies, though, popular opinion customarily trumps the views of experts. Exports are commonly associated with economic expansion and job creation, while imports are generally seen to threaten American companies and the livelihood of their employees. Not surprisingly, the populist preference for exports is reflected in trade policies which invariably aim to promote exports while using tariffs, quotas, and other restrictions to discourage imports.

But what about nations like ours which habitually over-indulge in imports? Normally, countries with balance of payments deficits are obliged to remedy the situation, usually by devaluing their currencies, hiking interest rates and slashing in public expenditure. Given the astronomical payments deficits the U.S. has been running in recent years, a sharp correction seems overdue. There is one important caveat, however. As even Alan Greenspan concedes, the globalization process may be altering the international trading system and thereby undermining the value of existing economic models.

Exports create jobs. In the 1980s, California officials justified the establishment of export promotion programs by arguing that exports create new jobs. By the reverse side of the same token, labor union officials contended that, if exports created jobs, then imports must destroy them. That proved to be a tough case to make. If trade deficits represent a drag on the economy, why then did the U.S. economy (and employment levels) grow substantially through the 1990s, even as the nation recorded the largest trade deficits in its modern history? It turns out that the relationship between jobs and trade is quite tenuous. Instead, the employment picture at any particular time is actually a function of macroeconomic factors such as the level of interest rates or the extent of government spending.

This is not to say that international trade has absolutely no effect on the labor market. There are plenty of cases in which lower cost or higher quality imports have cost American workers their jobs. But trade is ultimately a spur to competition. Imports abet the process of creative destruction by which healthy economies advance to ever higher stages of productivity and output. Trade becomes a political issue because, as in any competitive enterprise, not everyone wins.

Globalization will help spread our democratic ideals. As much as we’d like to think so, there is little reason to believe that economic integration will lead other societies to embrace America’s predominant political values. Indigenous culture still matters greatly in determining how societies organize themselves for economic and political purposes. Take, for example, the relationship between the individual and society. We Americans are quite unique in celebrating the rights and privilege of the individual as much as we do. Our Canadian cousins are much more apt to emphasize the individual’s responsibilities to the community. By even sharper contrast, Far Eastern cultures stress the primacy of the group -- whether it be the family, the company or the community. Indeed, given the huge population and economic prowess of a nation like China, it is sheer hubris on our part to assume that globalization will not help spread their social and political values along with our own.

Trade will help drain the swamps of poverty that breed terrorists. There is no question that international trade and investment have elevated the living standards of hundreds of millions of people who had historically eked out a marginal existence. But whether commerce alone can appreciably improve conditions in the world’s poorest nations is quite another matter. One reason is that these countries seldom offer the political and economic stability needed to attract foreign private investors. Another reason is that their principal exports tend to be raw materials, agricultural commodities and textiles, whose prices fluctuate wildly on the world market. Even more invidious is that their exports frequently encounter trade barriers the world’s richest countries have erected to protect their own farmers and textile companies. As The Economist magazine concluded earlier this year: “Global integration is a selective phenomenon. Many countries benefit; many do not.”