Globalization is the process through which people interact and integrate with each other. It also expands to include the interactions of one nation’s government with that of another and one company with another. The process of globalization involves the international trade and investment by people of one country into resources of another nation. This process is supported by the information technology; which includes the internet.
Globalization is not a new concept; people have been involved in international trade for centuries. In the old days, there used to trade caravans that would buy goods from one place and sell them at some other place. In fact, trade routes like the Silk Road and Suez Canal were formed by the people who came before us. However, in modern times globalization has become a reformed version of what it used to be.
The new modern technology has changed the picture entirely. Today, we have technology through which we can travel faster than ever and communicate with people on the other side of the planet; within a matter of a fraction of a second. Globalization has become the lifeline for most nations. Most of the nations rely entirely on globalization to survive. They either require other countries to buy their products or need them to sell cheap raw materials. It has resulted in increased competition, forcing local companies to fight extremely hard to survive.
Competition faced by local companies can either relate to the price of the product or service, target market, or technology. Hence, a company that has better technology can produce a product cheaper than its competitors. Today, several countries have the options to produce cheaper products; this has caused other countries to suffer. Since customers have an opportunity to buy a range of products they opt for the ones that are readily available and cheap.
Where some businesses seem to struggle because of increased competition from overseas competitors, others businesses have cashed in on it. Some businesses exploit new business opportunities by introducing new technology. The internet and e-commerce have seen a significant amount of work done by entrepreneurs in this regard1.
It should be noted, that the success of globalization depends heavily on technology. Hence, technology is the main arena for competition. Most developed countries have scientists, who are working diligently to upgrade technology so that their country may continue to excel in business. With technology, information gathering has also become an essential aspect of globalization. It has helped companies to analyze their customers in particular, and the markets in general. The analysis has helped the businesses to proliferate.
Q2: WHEN YOU COMPARE ABSOLUTE ADVANTAGE THEORY AND COMPARATIVE ADVANTAGE THEORY, WHICH ONE APPEARS TO BE MORE PRACTICAL, AND WHY? ALSO, EXPLAIN HOW BENEFIT FROM TRADE ARISES BASED ON THIS THEORY USING A NUMERICAL EXAMPLE OF 2 COUNTRIES PRODUCING 2 PRODUCTS.
Absolute Advantage Theory is the potential of a nation, individual or a company to produce a product; good or service, at a lower cost per unit compared to the price at which its competitor; another entity, provides the same product. It is apparently a theory that refers to the international trade; or globalization. In foreign trade, countries compete against each other, by producing the cheapest and better product compared to their competitor. Additionally, states that have absolute advantage can decide the one specific outcome they can deliver best. Once selected, they can direct their resources and energy to produce and sell that one product. This idea was apparently given by Adam Smith, back in the 18th century.
Comparative Advantage theory is an economic law that refers to the potential of any commercial actor to produce a product; good or service, at a comparatively lower opportunity cost than other actors. This law was coined by the political economist David Ricardo in his book ‘Principles of Political Economy and Taxation.’ The law states that all economic actors can benefit at the same time, from cooperation.
Comparative advantage is often compared to Absolute Advantage. To get an idea of the two theories, imagine there are an attorney and his secretary. The attorney is comparatively better in producing legal services, as well as types faster than his secretary. Apparently, in this case, the attorney has an absolute advantage over his secretary, in both legal services and secretarial work2.
Suppose, the attorney makes $175 / hour in legal services and $25 / hour in secretarial duties, while the secretary makes $0 / hour in legal assistance and $20 / hour in secretarial duties. In this case, the opportunity cost will play a role. For the lawyer to produce $25 for secretarial work, he has to let go of the $175 from the legal services. Hence, it would be better for the lawyer of he focuses his energies on the legal work, and outsource the secretarial work to the secretary. It will allow the lawyer to make more money in the limited time he has.
This concept can be applied to international trade as well. Suppose that there are two countries; China and the United States. China has the comparative advantage of having cheap labor, through which it produces products like cell phones and cars. The United States, on the other hand, has a comparative advantage in specializing production of sophisticated goods; like iPhone, and investment opportunities; like Berkshire Hathaway, which invests in various businesses3. Hence, both these countries have decided their specializations and do business in the global market, based on their qualities.
Q3: DONALD TRUMP, PRESIDENT OF UNITED STATES OF AMERICA, ANNOUNCED IMPOSITION OF TARIFF ON CHINESE IMPORTS IN THE RECENT PAST. BASED ON YOUR UNDERSTANDING OF THE FIRST 3 TOPICS OF THIS UNIT, (i) WHAT COULD HAVE BEEN THE REASON / LOGIC BEHIND SUCH A COMMENT / DECISION, AND (ii) WHAT ARE THE IMPLICATIONS OF SUCH AN INTERVENTION ON DOMESTIC CONSUMERS?
When President Donald Trump was running for Presidential elections, he claimed that if elected, he would impose tariffs on Chinese products. According to one report, he argued that he would impose a 45 % tariff on all Chinese imports. It may seem like something quite far-fetched, but the truth is, economists saw it coming. China will become United States most significant trade partner; exceeding Canada, in a matter of months. And it should be noted that the United States’ trade deficit with China was almost $500 billion.
A trade deficit of $500 billion is an alarmingly colossal amount. Apparently, the United States is losing more than just jobs for its local people4. The United States saw a recession, not long ago, and it needs to get back on the track, however, with China doing all the manufacturing, the country has become merely a buyer. There is very little United States is selling, compared to China.
In the sections above, it has been explained the comparative advantage theory claims that nations can profit when each one of them focuses on producing the product, or service, they are useful in making5. Apparently, this has not worked well in the case of China vs. The United States. Economists claim that the China Shock has cost the country around 800, 000 to 1 million jobs. And in the last two decades, the United States has lost almost 5 million jobs.
Donald Trump claims that there is a trade war with China, instead of a conventional war. He further argues that the U.S is on the receiving end of this war because it has so far not been able to recreate those lost jobs or cover the trade deficit. Apparently, United States has suffered a lot because of globalization. Had it not been for globalization, United States would have been manufacturing all the products it uses, and it had not required China or any other country at all. It is true that American people in business went to China because it can supply products cheaply. But when considering the overall loss, it is evident that the United States would be better off by itself, especially if it does not have a better deal from China.
- How globalization affects business | Bookboon Blog. http://bookboon.com/blog/2011/10/how-globalization-affects-business/. Accessed November 7, 2017.
- Absolute Advantage. http://www.investopedia.com/terms/a/absoluteadvantage.asp. Accessed November 7, 2017.
- Staff I. Comparative Advantage. Investopedia. http://www.investopedia.com/terms/c/comparativeadvantage.asp. Published November 19, 2003. Accessed November 7, 2017.
- Here’s How Donald Trump Plans to Get Tough on China. Fortune. http://fortune.com/2016/08/25/donald-trump-china-tariffs/. Accessed November 7, 2017.
- Haberman M. Donald Trump Says He Favors Big Tariffs on Chinese Exports. The New York Times. https://www.nytimes.com/politics/first-draft/2016/01/07/donald-trump-says-he-favors-big-tariffs-on-chinese-exports/. Published January 7, 2016. Accessed November 7, 2017.