Lessons in Globalization and International Trade
Economists and policymakers, both aspiring and practicing, are in a particularly busy time of analyzing and understanding markets and what moves them.
The economic headlines have been broadcasting news of persistent inflation and tighter monetary policy in the U.S., the European Union and elsewhere, prompting many of us to join the Federal Reserve watch on interest rates. What will they do next? Most recently: the Fed decided to leave interest rates (already elevated following 11 consecutive hikes starting in March 2022) unchanged despite stubborn inflation.
Inflation and monetary policy affect other areas of macroeconomics, as well – namely international trade.
Trade is when a company in a particular country sells goods outside its borders or buys goods that come from somewhere else. As former Wharton School management professor Ann Harrison, now dean of UC Berkeley’s Haas School of Business, previously shared with Wharton Global Youth: “iPhones are manufactured outside the U.S. To get them here, we need to bring them in, which is an import. When we sell goods around the world, that’s an export…this is the backbone of trade.”
Trade is influenced by the changing economic environment. For example, economists with the World Trade Organization scaled back projections for growth in global merchandise trade in 2023 amid a “continued slump” that began in the fourth quarter of 2022. Macroeconomic factors like inflation, Fed policy, consequences of the war in Ukraine, and other factors have “cast a shadow over the outlook for trade,” said the WTO. “The trade slowdown appears to be broad-based, involving a large number of countries and a wide array of goods.”
The Power of Resilience
Economic impacts on global trade date back a few years, suggests Anthony Landry, a Wharton adjunct full professor of finance and deputy vice dean of the Wharton MBA program. “Until COVID, I would say that global trade was an efficient way in which companies, especially multinationals, were expanding,” says Landry, who specializes in macroeconomics and has worked as a senior economist and economic policy advisor. “Since COVID-19 happened, we’ve seen, especially in the U.S., the relocation of a lot of that manufacturing activity. This is because firms were thinking about whether efficiency was better than resilience. They had so many problems with supply chain during COVID, that resilience [to quickly recover from a shock or disruption] became more important for them.”
With the pressure of geopolitical tensions, companies have preferred in recent years to invest in trade practices known as friendshoring or reshoring, notes Landry: “Friendshoring would be to bring that production to one of the countries that is either close or friendly to the U.S., while reshoring would be to bring back that production here within the U.S.” – thus, strengthening that resilience. Landry adds that other factors like technological advances and the regulatory environment have made the prospects of international trade more costly for manufacturing companies.
Despite the current economic challenges and this shift to a resilience mindset, the World Trade Organization and others predict that trade growth should pick up as inflation moderates and interest rates start to come down.
Landry stresses that, when faced with shifting business cycles and macroeconomic trends, it’s important to remember why countries trade in the first place. He presents his students with three fundamental motivations for international trade. They are:
1️⃣ The spice of life. “We all like variety,” says Landry. “Some countries are better at producing certain goods. We trade with France because we sometimes enjoy a different glass of wine. And we trade with Canada because we sometimes enjoy maple syrup. Our love for [choice] here is going to play a role in trade.”
2️⃣ Playing it safe. “The second big reason we trade is to reduce risk,” notes Landry. “Think about the big natural disaster that might happen around California, which makes getting wine this year impossible. We will still be able to drink wine because we will rely on the production of another country, such as France.”
3️⃣ It’s good business. “The third reason we trade is because it’s efficient,” says Landry. “Some countries are just relatively better at producing, say, toys than computers. And by specializing in what we’re better at, there is a welfare gain [a boost in economic wellbeing] that happens on both sides. If we think about manufacturing activity happening in China and the technology development happening in the U.S., while the U.S. might be slightly better than China producing both computer and manufactured goods, there’s actually a welfare gain to outsource manufacturing to China and specialize in producing technology like computers here in the U.S.”
In his macroeconomic professional and academic life, Landry has thought deeply about the bigger concept of globalization, or the process of increasing economic interdependence among nations. Globalization is reflected in the growth of cross-border trade in goods and services, which he and others believe has helped to alleviate poverty in some countries.
He is a champion of globalization and its effects on economic development. “In the U.S. sometimes we feel that globalization has hurt a segment of the population – and it did – but overall it has been a positive for the U.S. And it has been a positive for the world,” suggests Landry. “For example, outsourcing the manufacturing of washing machines to China hurt those who were producing washing machines badly. But on the other hand, now it means that everybody in the U.S. can [buy] washing machines for $100 less. The pain is very concentrated, but the gain is spread. And the total effect is positive.”
While the current trade slowdown may threaten the living standards of people around the world, a rebound is expected. Said WTO chief economist Ralph Ossa: “Positive export and import volume growth should resume in 2024, but we must remain vigilant.”
Conversation Starters
What does Dr. Landry mean when he says that companies pulled back from international trade because they were prioritizing resilience over efficiency?
What are some of the business benefits of international trade?
Dr. Landry believes that globalization has been a positive for the world. Do you agree? Why or why not?
Does trade lend itself to value gained, or value made? What I mean is, when, say, the US trades with a country like India — is it in majority because India has specific people who have the ability to make a product? Or is it because India can make the product in a different, better way? This is important, just stick with me. As time goes on, immigration into the US grows more and more. Additionally, there are cases when trade with foreign countries is because of the PEOPLE in the country, not the country itself. Thus, we ask again: value made or added? With the rise of immigration, trade that is in place because of people rather than country will definitely decrease. This will change the world economy. If people make value, then immigration leads to less trade, and more monopolization in the world economy.
This is especially important to me. Growing up as a first-gen American and in a household of “aday yarr!” (translation: ‘cmon man!’), immigration has always been at the forefront of my mind, much like the bindi my mom always wears. As more of my older cousins make their way to the US, the question I find myself asking is whether or not this is GOOD. Though we’ve been taught the traditional ideals our parents were programmed to feed us, low-income indian first-gens like myself make feel adversity in this area — adversity from our own minds. We are generally taught that we MUST immigrate, and it is essential. But taking a step back, the question is how much of an impact it has on the world economy. It is a moral struggle and a personal battle, fighting between wants and global needs.
And I think I’ll be up all night thinking about it.
Hey Sagar,
You made me stay up all night trying to answer all of the questions you asked in your comment! Let me know if I managed to give a good answer to at least some of them.
When considering whether trade lends itself to value gained or value made, it’s essential to understand the fundamental motivations for international trade, as highlighted by Anthony Landry in the article: Variety and Specialization, Risk Reduction and Efficiency and Economic Gains. So, in your example of the US trading with India, it can be both due to India’s specific capabilities in manufacturing certain products and the efficiencies they bring to the process. For instance, India might have a cost advantage in producing certain textiles or technology services due to its labor market and expertise. This is value made through the combination of skilled labor and efficient production methods.
About immigration, it indeed plays a significant role in shaping the economic landscape. Immigrants usually contribute diverse skills, innovation, and labor force participation which can enhance economic growth for host countries. However, I think that there is more than meets the eye in your worry about immigration reducing trade.
Firstly, I think that immigrants often complement the native workforce rather than substitute it. They can fill gaps in the labor market, contribute to innovation, and drive economic activity. This does not necessarily reduce trade but can shift the nature of trade. For instance, if skilled immigrants help develop new technologies, the host country might export more tech products.
Secondly, immigration can foster better global connections, leading to more robust trade relationships because immigrants often maintain ties with their home countries, which can facilitate trade and investment between the host and origin countries.
Lastly, while your concern about monopolization is valid, it is also essential to consider that open economies with diverse labor forces tend to foster competition and innovation rather than monopolization. So, I tend to believe that immigration can actually lead to a more dynamic and competitive economic environment, benefiting both the host and global economies.
Dr. Anthony Landry’s point on how a lack of resilience in the US economy led to the supply chain issues from the COVID pandemic made me remember the shortage of personal protective equipment (PPE), like face masks and gloves, in the beginning of lockdown. He also predicts that, because of geopolitical tensions among trading partners, globalization has slowed. Countries currently prefer trading with allies, and they are moving critical supply chains back to themselves, but globalization will rise again in the near future. Although I agree with him, I believe that it will improve to better mitigate risks and benefit more countries.
International trade undoubtedly increases efficiency through comparative advantage: it lowers prices of imports, raises production of exports, and encourages specialization and quality. However, it is also true that resilience is just as important as efficiency, if not more so, especially in times of crisis, such as the pandemic. At the start, China limited exports of goods like PPE, creating a shortage of it. I remember how hard it was for my family to buy face masks and hand sanitizers, and news reported many stores frequently ran out of PPE since people didn’t know how long the pandemic was going to last. The US realized that we were not prepared and depended too much on China, our largest trading partner at the time.
Another example is that when Russia invaded Ukraine, the prices of oil and natural gas sharply increased in the beginning, raising the already high inflation. The countries relying on Russia’s resources faced the risk of energy shortage. Every time I pass by a gas station, it seems like the prices keep growing and growing. There was also the risk of global food shortages, as Russia prevented Ukraine’s grain exports by blocking marine ports and attacking grain storages. It is impressive and frightening that a war in a country an ocean away from where I live can have such widespread economic impacts, showing just how interconnected the global economy is. It was clearer than ever in these past five years that resilience is imperative.
Fortunately, we have now learned, and governments and businesses are changing policies and strategies towards international trade. Dr. Landry brings up reshoring and friendshoring, which I believe links to trade diversion conducted by trade blocs to mitigate risks and ensure national security. Since imports from China in the US have declined post-pandemic, American companies are looking to other countries to diversify supply chains. For example, Ford reshored manufacturing to the US due to high costs and supply chain disruptions. Although friendshoring does help with stability, we need to realize that international trade does not mean trading with a select few other nations. I hope that, when globalization grows again, we will move towards a more balanced global economy.
Many believe that geopolitical tensions are forcing an increasing number of countries to de-globalize, but in the US and Europe, which are consumer economies, international trade for the past 30–40 years revolved mainly around trade with China. Just imagine how many items you’ve bought that are labeled with “Made in China.” In order to truly build global economic resilience, it is imperative to equalize the benefits of international trade for all nations. In fact, Mexico has now replaced China as America’s largest trading partner, and various interests have moved out of China into other countries, including Vietnam, India, Canada, and Mexico. As globalization continues to make a comeback, I believe more and more countries will have greater representation in the global economy, which will both increase efficiency and resilience.
As the saying goes, “Don’t put all your eggs in one basket.” We need to de-risk and prepare our systems to handle any situation the world may throw at us. As the WTO predicts, international trade is likely to increase again soon because, as Dr. Landry says, the original benefits of globalization remain the same. We simply need to adapt to the ever-changing business cycles and macroeconomic trends, which, of course, is easier said than done. We should focus our economic policies and strategies on enlarging our supply chain and balancing resilience and efficiency in order to strengthen international relationships and national security. Especially in an era of rapid technological development, I’m confident that this upgraded form of globalization will blossom more than before, making international trade more efficient, resilient, and beneficial to more nations.
Dr. Landry’s insight reveals a pivotal shift as he outlined companies (especially MNCs) are pulling back from international trade to fortify their resilience, valuing stability and considering the firm’s future growth over sheer efficiency. COVID-19 significantly highlighted the risks of relying heavily on distant and potentially unstable international suppliers for many companies, for example – delays in transportation, shortages of supply, and disruptions caused by lockdowns and restrictions. They soon realised that their goal of solely optimising cost and production process wasn’t thoughtful enough, as a result, companies started prioritising resilience to be better prepared to withstand and quickly recover from such disruptions. The act of friendshoring by Apple – aiming to 25% of its iPhone production to India by 2025 will not only diversify its supply chain but also improve cost efficiency and margins.
However, while prioritising and gaining resilience is the key objective for MNCs, maintaining international trade is still essential for businesses. As Dr. Landry said, “We all like variety,” international trade allows firms to access capital goods in wider varieties and cheaper resources sold in the most specialised country. This lowers the production cost, reduces waste, and helps the world’s economy to grow. More importantly, businesses will be able to sell goods and services in wider markets, this helps to reduce the risk of business enterprise and offset loss and decline. International trade further allows firms to exploit economies of scale as the demand and output for the product increases, their average cost decreases, which improves their efficiency and profitability. Toyota, the Japanese car company, was exporting more than three-quarters of its overall production worldwide, with North America being the largest source market for its vehicles.
I agree with Dr. Landry’s perspective in seeing globalisation as a positive action for the world, I believe it will not only benefit the producers, but also creates significant social welfare for consumers, countries, and labours. Globalisation encourages companies (especially MNCs) to setup production in developing countries to reduce their production cost, increase scale and revenue; there will be an increase in the labour supply for firms which causes an outward ship in the supply curve, reducing wages, and labour shortage during economic growth (demand for labours are derived demand by consumers); usually choosing developing countries as the host country will have a low corporation tax which reduces their cost, possibly improving investment and innovation. As Dr. Landry mentioned ‘Our love for [choice] here is going to play a role in trade,’ globalisation increases consumers’ choice (as imported goods), raising their living standard, and preventing them from being exploited by firms (close substitutes available in the market). As for the host countries, there will be a sharp boost in the nation’s output, income, and GDP as globalisation causes easier production and trading which could generate a current account surplus and possibly cause an appreciation of its currency; as MNCs expand, they cause job creation which largely decreases the unemployment rate (a macroeconomic objective); introducing of modern plants, working practice, and technology will help the host country boosting productivity, driving innovation, and enhancing competitiveness in global markets. Furthermore, globalisation creates more opportunities for people to work in more developed countries, this increases their wages and reduces the number of people suffering in absolute and relative poverty; providing education and training for labours will significantly increase their wages, motivation, and makes them more employable.
After reading Dr. Landry’s profound perspectives and insightful analysis, it has driven my curiosity to research more about this topic!
Dr Landry provides excellent insights into how the changing economic environment impacts of global trade, as well as how the phenomenon of globalization can be situated in present-day complications of political friendshoring and pandemic-related supply chain disruptions.
I found Dr Landry’s analysis of how trade benefits and hurts different segments of the US population differently to be particularly interesting. Although bipartisan sentiment in the US is trending towards the idea that globalization hurt the manufacturing middle class of our economy (likely in the form of structural unemployment), it has also provided larger-scale benefits of lowered prices. “The pain is very concentrated, but the gain is spread. And the total effect is positive.” I agree with this statement, and to provide support for it, we can examine economic models like David Ricardo’s specialization and comparative advantage that can be said to support efficiency in the debate over whether during the pandemic, “firms were thinking about whether efficiency was better than resilience.” Globalization has provided net gains for maximizing efficiency and providing larger markets for firms to export to and promoting investment in developing countries.
Another interesting model to consult is the elephant curve by Branco Milanovic. The curve plots percentile of global income distribution against growth rate of real income, with the graph showing notably increasing rates of real income growth up to the 65th percentile and again from the 90th percentile onwards. But in between, there is a notable dip in the curve, showing very little growth around the 80th percentile – this is likely to reflect the manufacturing base in the US. As a result, one could argue that there is still a large segment of the population who have struggled amidst globalization, particularly as cost of living has simultaneously increased in recent years.
The role of multinationals is also interesting. “Until COVID, I would say that global trade was an efficient way in which companies, especially multinationals, were expanding.” Dr Landry’s comment provides a strong analysis to the trends of global trade, but I would also caution against the standalone growth of multinationals. Due to their scale, size, and large employment numbers, multinationals are able to obtain economies of scale and have monopolistic price-setting and wage-setting abilities, due to their name brand and foreign investment. We focus largely on the economic impact of importing goods back to the US, but it is vital to examine the extensive nature of the entire supply chain. Alongside these multinationals, amidst globalization, we must also find a means to ensure the visibility and market share of local producers.
A mutual understanding between social groups impacted differently by globalization is vital to ensuring we take the correct next steps alongside its advance in future years.