International Trade in an Increasingly

International Trade

In an increasingly globalized world, international trade has grown rapidly, providing both opportunities for workers and threats. The underlying concept of international trade is that by removing trade barriers, the global economy will be more efficient. In order for the economy to be more efficient, resources need to be allocated differently. This will result in changes to global patterns and flows. Capital flows will alter as barriers these flows are reduced. The same can be said of goods, in particular with respect to production location. In recent years, transportation has become so efficient that it allows for goods to be produced in distant locations and transported around the world. Similarly, information technology has transformed the way that we communicate ideas. In addition to reallocation of productive resources, new opportunities are created through international trade, because new combinations of inputs are possible, resulting in new industries, new products and new services. Both reallocation and the creation of new markets represent both opportunities and threats to workers.

Harrison and McMillan (2011) point out that the increase in globalization in recent decades has increased opportunities for workers in the developing world. They cite the fact that 44% of workers of U.S. multinationals work overseas, many in the developing world, and that this represents a significant change from even the early 1980s. Much of this new employment growth in the developed world has come in the manufacturing sector, and at the expense of workers in the United States. The reason is simple comparative advantage. Developing world nations have very low labor costs compared with Western countries, so they have an absolute competitive advantage. The more labor-intensive the industry is, the more the benefit of offshoring that labor is. Not only does this represent a threat to workers who are losing their jobs to overseas competition, but the workers who do remain, and face competition from overseas, are subject to reduced bargaining power. Brock and Dobbelaere (2003) demonstrate that wage price competition from overseas reduces wages in the developed world, even when jobs are maintained.

However, international trade based on comparative advantage should also create opportunities and indeed it does. The reallocation of resources to improve efficiency means that less manual labor is conducted in the West because on a comparative basis Western nations perform better at innovation, and at knowledge-intensive businesses in general. This is because we have better access to education and to information, and our cultures are more attuned to innovation and entrepreneurship than perhaps is the case in other parts of the world. International trade means that our knowledge can be used to earn money all over the world, whereas for most of the 20th century it was likely that most firms in the West earned most of their money in the West. Today one video game impresario can have his company move him to Beijing to start an entire studio based on his ideas and Chinese labor.