The Case Against Economic Globalization

The Argument Against Economic Globalization & Globalism

The Cato Institute boldly claims that free trade benefits all.

Wrong.

There are very few absolutes in life—and none in the realm of economics.

There are exceptions and limitations to every rule, no matter how robust they may seem at first. Even the “axiomatic” laws of supply and demand can be violated, as happens daily in luxury markets—the more expensive the Lamborghini or Gucci handbag, the more people want it.

And free trade, the colloquial shibboleth for economic globalization, is no exception.

In reality, economic globalization is domain-specific—sometimes it’s good, sometimes it’s bad, depending upon where you are, and who you’re trading with.

For Americans, it’s been bad. Real bad.

And I think it’s obvious: the signs of America’s economic collapse are everywhere, from the decrepit and derelict factories in the rust belt, to the astronomically high (real) unemployment rate.

People are feeling the pinch.

Frankly, it’s one of the main reasons why millions of people got out and voted for Donald Trump last year. They found comfort in his promise to scrap TPP and renegotiate NAFTA (promises which he’s actually delivering on).

But is this anger justified? Or, is the Mises Institute right to assert that economic globalism has benefited most Americans?

This article answers this question. Mises, and Cato, are dead wrong.

In reality, economic globalization has eroded America’s economic, and industrial lead over her rivals, and impoverished the American people. The supposed benefits of globalization, instead, accrued to America’s globalist elites (the plutocratic class, who aren’t strongly tied to our soil) and multinational corporations.

The average American got screwed.

But before I make my case, I think it’s best we define economic globalization, and globalism. This way we’re starting with the same point.

What Is Economic Globalization?

I’ll try to define economic globalization in neutral terms, upon which we can all agree—if you think I’ve been unfair, let me know in the comments below. But for now:

Economic globalization describes the increasing movement (trade) of goods, services, labor, and ideas between states. Fundamentally, it boils down to increasing connectivity, and interdependence, between individuals, and regions, on a global scale.

This connectivity is enabled by better transportation and communications technologies—and, of course, the political impetus to lower artificial barriers to trade.

That’s the bare-bones, technical definition. Here’s another for good measure.

But of course, there’s more to it than that.

Language is idiomatic, and the technical definition doesn’t capture what’s at essence in the political debate over economic globalization—not by a long shot.

Most people (myself included) are OK with importing bananas from Guatemala, rubber from Malaysia, or diamonds from South Africa. Economic globalization undoubtedly gives American consumers access to exotic products that we otherwise couldn’t procure.

No one cares about that—if you’re an ardent free-trading globalist, stop bringing up this red herring, it’s getting old.

No. Critics of economic globalization are concerned with offshoring, and its deleterious impact on employment and long run economic growth—there’s a big difference between trading American cars for Mexican strawberries, and relocating an American auto plant to Mexico, then buying cars and strawberries with debt.

If you can’t see why, it’ll become clear soon enough.

Regardless, I’ll be making the case that unrestricted economic globalization (free trade in all circumstances and conditions) is bad, and that it’s done more harm than good over the last 50 years.

The Pros and Cons of Economic Globalization

It’s really easy to make a strong argument look good when there’s no point of reference, or no counterpoints—even a crappy boxer would look like Mike Tyson against someone who doesn’t even know how to make a proper fist.

So in the interests of a spirited debate, I’ll present both the pros and cons of economic globalization.

Arguing in favor of economic globalization and free trade, will be Milton Friedman and Thomas Sowell, two widely respected economists.

Then I’ll take them on.

The Economic Benefits Of Globalization And Free Trade

Milton Friedman On Free Trade: The Pencil Example

Watch this short clip, where Milton Friedman presents his famous pencil example, then we’ll talk about it.

Milton Friedman’s point is pretty straightforward: we couldn’t have pencils without economic globalization, since all of its components come from different areas. Also, the cooperation and interdependence will lead to peace.

Furthermore, he implies that more international freedom means more efficiency, and therefore cheaper pencils—a point he makes repeatedly in his book Free to Choose.

Basically, economic globalization leads to world prosperity and peace.

It’s a little too utopian for my taste, but I’ll give you an earful soon enough.

But very briefly: this argument is the red herring I mentioned before. Of course we need to import rubber from Malaysia—we don’t grow rubber trees in the US. No American workers or industries are displaced by importing rubber, therefore it can only benefit our economy.

However, say we start importing aircraft from Japan, rather than making them ourselves: this would put American industries in direct competition with Japanese ones (that might be propped up by the government, and therefore have an unfair advantage).

In this case, the benefits aren’t so clear cut: maybe we get cheaper aircraft today, but forfeit our ability to build them tomorrow (at which point the Japanese jack up the prices, having taken strategic losses in the short term).

There’s more to economics than maximizing efficiency—every businessman knows this, it’s a shame university-educated academics don’t seem to get it.

Thomas Sowell On Economic Globalism: Isolation Leads To Poverty

Again, watch the clip of Thomas Sowell discussing the benefits of connectivity and free trade:

Thomas Sowell’s main point is that places that are isolated, and that don’t partake in the global economy (whether due to geographical, or cultural reasons) fall behind. Basically, the benefits of global integration greatly outweigh the negatives.

Now, I actually like Sowell (can’t stand Friedman), and I think his point is often true—but not for the reasons he stated.

Sure uncontacted Brazilian tribes are technologically and economically undeveloped, but that’s not necessarily because they didn’t trade with other tribes (they do, and did). It’s because of a low population density, a horrible climate, lots of disease, low average IQ due to parasitic infections and bad nutrition etc. It’s not because of isolation.

Why do I say that?

Great Britain was one of the most economically isolated places on the planet (and certainly the most isolated in Europe) during the late 1700s and early 1800s. And yet it was Britain that birthed the Industrial Revolution, and had the most rapid economic and technological growth.

Economic isolation can be good.

The same was true of the US. Between 1850 and 1970 America was not only the most isolated Western economy, but it was also the fastest-growing, and most prosperous.

Sowell’s logic just doesn’t ring true historically.

There’s no correlation between the level of economic globalization and wealth—in fact, the opposite is often true.

There are too many other factors at play to boil it down to simple “economic globalization” good, isolation bad.

The Negative Effects Of Economic Globalization

Now it’s my turn.

There’re a few ways I could approach this. The easiest way would be for me to point America’s economic problems, and show how they’re linked to economic globalization, and not to politically benign things like automation.

But like I said in the introduction, the evidence is self-evident and overwhelming.

Instead, I’m going to work through some of the logic underpinning economic globalization, and show that the emperor has no clothes.

1. Free Trade Is Domain-Specific, And Doesn’t Always Apply

Global free trade is underpinned by David Ricardo’s theory of comparative advantage (if you’re interested in fully understanding this critique, read the linked article before moving on, I’ll just summarize it here).

But, like any theory, it has its limits—it’s domain specific, it only works in certain situations, under specific conditions.

David Ricardo, creator of the theory of comparative advantage — David Ricardo (d. 1823) is best remembered for his theory of comparative advantage. He was a very smart man, who admitted his theory had epistemic limits.

What Is Comparative Advantage?

Basically, it’s the idea that countries should trade stuff they’re relatively good at making for stuff they’re relatively bad at making.

This improves economic efficiency, and therefore makes everyone richer.

It’s a good theory, and it’s true. The problem is that free-traders always ignore its domain restriction: David Ricardo says comparative advantage only works in situations where capital is immobile, because otherwise domestic industry could be relocated abroad, and the goods bought using debt, which would trade long term growth for short term gain (the offshore outsourcing problem).

This is the issue modern critics of economic globalization have: offshoring leads to unemployment, import dependency, and hollows out domestic industries.

But Ricardo argued that capital immobility wasn’t a problem (at the time) for two reasons.

First, he said that people aren’t greedy enough to betray their nation. He wrote:

…most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations…

Basically, Ricardo assumed that patriotic investors would buy domestic, even if it was more expensive. Of course, that’s not true.

capital is mobile in a global economy — In today’s economy, capital is incredibly mobile. Shipping is incredibly (almost hilariously) cheap, credit is plentiful, and it’s very easy to relocated entire factories abroad.

He also employed a more technical defense: he argued that offshoring was impossible because capital was immobile (ie. you couldn’t move a factory, even if you wanted to).

This was true when he was alive, but not anymore.

Today, capital is incredibly mobile, and it’s very easy and (almost hilariously) cheap to relocate a factory to a developing country. Just look how rapid China’s manufacturing industry developed.

To sum up: comparative advantage (the theory underpinning global free trade) only applies in situations where capital is immobile. Therefore, it applies to things like agricultural products, or mineral deposits (which can’t be moved), but not necessarily to output that can be offshored, like manufactured products, or services.

Sure outsourcing IT research to India might save money in the short term, but it deprives America of a large portion of its IT industry, which is a major source of growth (now a portion of the growth is in India, rather than being entirely in the US).

Basically, we can’t just apply comparative advantage blindly and assume the result will be optimal: there are other factors at play. David Ricardo recognized this, and so should his disciples.

2. Free Trade Doesn’t Cause Long Run Economic Growth—Better Technology Does

Justifications for economic globalization are predicated upon a faulty understanding of how the economy grows.

Again, I’ve written an extensive article on long run economic growth which is worth reading. But for now, I’ll just highlight the main points (they’re still convincing).

When two countries trade and maximize their comparative advantage, they get a one-time efficiency boost. That’s it.

Let’s look at an example. Say it’s 1750 and France start trading with Spain, and leave Britain out of the loop. They do so until both are maximally efficient. Did their economies grow? Sure. But now they’re done. No more trade efficiency can be reaped.

Meanwhile, Britain spent it’s time inventing steam engines, and quickly surpasses the two of them combined in terms of economic growth.

Why?

Because France and Spain are maximally efficient using pre-industrial technology, while Britain is using industrial technology (while not reaping trade efficiency). But it doesn’t matter—better technology is more beneficial than efficient use of old technology. That’s a fact.

Economies grow when they make more stuff. And in the long run, you can only make more stuff by inventing, or adopting, more productive technologies.

How do you do get better technology?

At the statistical level, it boils down to chance, you can’t force people to invent stuff—but you can increase your odds.

This is done by increasing intellectual and economic freedom (within the country), ensuring that as much cutting-edge industry is concentrated within your borders as possible, and ensuring all the necessary resources are easy to procure.

This will ensure that your country is fertile ground for inventive minds.

Now, given this understanding of economic growth, you can see how economic globalization could undermine it.

For example, if America allows its companies to invest in research labs in India (rather than at home), the locus of invention shifts towards India—they get technical facility, cutting edge research, and an intellectual infrastructure, while ours dies on the vine.

In the future, big discoveries that shift the economic paradigm will be more likely to be made in India—we should be concentrating them (and the economic growth), here at home.

3. Economic Globalization Predicts Absurdities

No one would have believed Isaac Newton if his theory of gravity predicted that apples fell up: a theory is only useful if its predictions match reality. The same is true in economics.

The fact is that the logic underpinning globalism results in a reductio ad absurdum—it logically predicts absurd results.

Absurdity #1: Rich Countries Have Specialized Economies

If we take comparative advantage and apply it globally, it suggests that the way to get rich is to specialize.

This is because the more specialized the economy is, the more of its comparative advantage is likely being maximized.

In reality, the opposite is true.

Richer countries usually have diverse, not specialized, economies.

This is because businesses, and industries, cluster together. By doing so they can share supply chains, labor markets, knowledge, and transportation costs etc. Essentially, where you find one thriving industry, you’ll probably find more.

There’s a reason the term banana republic is synonymous with poverty: no matter how specialized you are, it’s hard to get rich when a stiff frost could wipe out your entire livelihood.

Absurdity #2: The Type Of Output Doesn’t Matter, Only The Degree Of Specialization

The logic of economic globalization also suggests that the only, or at least key, variable in getting rich is the degree of specialization.

Theoretically, it doesn’t matter if the country specializes in growing coffee or oil, or in making chess pieces or semiconductors—again, what matters is how much comparative advantage is being maximized.

But in the real world, there is a very strong statistical correlation between a country’s wealth and the complexity of its exports—what you make matters.

A country building jet engines and semiconductors is going to be richer than one making jerked beef and cornmeal (regardless of how specialized they are at jerking beef). That’s just how it is.

Compare the exports of the United Kingdom and Kenya, and you’ll get the point:

Bottom line: not all industries are of equal value. Pharmaceuticals is simply more valuable than dairy or corn.

Period.

Specialization via free trade won’t necessarily make a country rich—having the right industries will.

Sometimes, free trade undermines these lucrative industries (by offshoring them to developing countries), and therefore hurts economic growth.

4. Free International Trade Boosts Consumption, Not Necessarily Production

There’s another implied theoretical limit when it comes to comparative advantage: it only applies when trading output for output; it doesn’t apply when trading debt or assets for output.

Look back at Ricardo’s original example: he explicitly compared the production of cloth and wine. He made no mention of what would happen if England sold their old curtains (assets), or bought Portuguese wine on credit cards (debt)—that’s because they throw a huge wrench in the machine.

For example: if America trades houses and corporate shares for Chinese goods, then it’s possible that global production would actually fall, until America runs out of accumulated and promised wealth to sell.

In this case, wealth is shuffled around, rather than created. The same is true of debt.

This is what’s currently happening.

This process is unsustainable: America will eventually run out of stuff to sell.

At that point, we will either need to decrease our consumption (which lowers our standard of living) or increase our domestic output to trade for Chinese goods (why delay what’s inevitable?).

Right now we’re living in a consumption bubble, paid for by selling our inheritance and mortgaging our future. When it bursts, we’ll be worse off than if we had never traded. Mathematical modeling done by Joseph Stiglitz proves this point.

Eventually we’ll have to pay the piper—everything has a price.

5. Globalism Mothballs Industries, Which Leads To Productive Inefficiencies—The Okun Gap

It should be fairly obvious to anyone that factors of production (things like buildings, machines, people) don’t always move seamlessly between industries.

What does that mean?

Pretend America sings a trade deal with Nepal. As it turns out, the Nepalese are very adept at building jet turbines (for cheap). In exchange, they buy America’s sirloin steaks. They love Texas prime.

This situation is bad for America’s jet turbine makers (who go out of business, or relocate to Nepal), but good for our cattle ranchers.

The problem is that all of America’s turbine factories, the machinery, and the technicians and engineers are now unproductive, since capital equipment from the turbine industry can’t be used in ranching (engineers usually make bad cowboys, go figure).

America's rustbelt & industrial decline was caused by free trade — Abandoned factories dot the landscape in America’s rustbelt. Imagine how much production we’ve lost by letting them remain idle. This undermines the supposed benefits of free trade—they’re not as big as you think.

The factories and machines will be scrapped, and the workers will need to find other employment. This all takes time, and sometimes the capital sits idly for years—even decades. Just look at all the factories in the Rustbelt that are idle to this day, how much production did we lose?

The disparity between what the economy could produce at full output (if capital was being employed, rather than mothballed or transitioned) and what it is actually producing (apparently more efficiently due to the maximization of comparative advantage) is called the Okun gap.

When this is taken into account, the “benefits” of economic globalism aren’t as big as we’re led to believe.

6. Economic Globalism & Global Free Trade Fail In Reality

One of the running themes of this critique is that theory doesn’t always match reality, so we shouldn’t bind ourselves slavishly to our ideology.

We should do what works, even if it’s counter-intuitive, and even if so-called “experts” disagree—you’ll notice that very few economics professors are rich, meanwhile businessmen who “don’t know anything” are partying on their yachts.

When a professor says something, it needs to be judged on its merits—even if the assertion comes from someone like Milton Friedman or Thomas Sowell.

Reality always supersedes credentials and theory—the best way to grow the economy isn’t always the most efficient way.

Examples Of Economic Globalization’s Predictive Failure

Let’s look at some historical examples to illustrate my point:

In the 1980s the it would have been rational, according to free trade theory, for China to invest heavily in agriculture, to better maximize its comparative advantage in sericulture (silk) and rice-growing—in other words, get more efficient in China’s traditional economic paradigm.

Hong Kong & China benefits from free trade, at America's expense — Hong Kong’s glittering skyline—it wasn’t big rice money that paid for all this.

They didn’t do that.

Instead, they invested in manufacturing (for which they lacked even the most basic infrastructure or skills). This was inefficient (short term), but beneficial (long term).

Now, you could say that they got rich because of economic globalism. In a sense, yes. But like I said, this assertion is a definitional equivocation: we’re talking about economic globalization in terms of universal free trade and open markets, not China’s predatory, neomercantile policies.

The same was true of India‘s investments in IT industries, and yet technology has turned into India’s economic bread and butter. The right kind of short term pain can result in long term gain, and the opposite is also often true—there is no easy money.

Perhaps the most ironic (and best) way to end this section is to revisit David Ricardo’s example, and look at what happened in real life.

England and Portugal actually did trade wine and cloth historically.

In 1703 they signed the Treaty of Methuen, which, among other things, exempted English cloth from Portugal’s import prohibition.

In the following decades, Portugal’s textile industry was destroyed by cheap English imports, and Portugal indeed resorted to exporting wine.

Soon afterwards England:

Gained a textile monopoly in Portugal (they could drive up prices to above-market rates).
Expanded her increasingly-advanced textile industry (which stimulated mechanical and engineering breakthroughs which birthed the Industrial Revolution)
Used the profits to buy up Portugal’s vineyards, thus securing both industries (cloth was more lucrative than wine).

In the end, this deal helped England industrialize and grow rich—at Portugal’s expense.

This was great for England (China) bad for Portugal (America).

So much for “efficiency”.

7. Economic Globalization Is Bad Politics: Economics Isn’t Everything

It’s important to remember that comparative advantage, and the globalist agenda built upon it, is merely a tool that tells us whether or trade is efficient—it doesn’t tell us whether its strategically beneficial, or economically sound.

Globalism isn’t an economic policy, any more than “supply and demand” is economic policy.

Lots of people, from Henry Kissinger or Milton Friedman, forgot this.

Why not?

The Political Impact Of Economic Globalism

Perhaps it was efficient to offshore our factories to China (& friends), but was this good policy? Did we consider the consequences? No.

There are two political points worth considering here.

First, America’s lost 10 million jobs due to offshoring—this means lots of unemployed people. What do unemployed people do? They collect welfare, or at least draw from social services more than they pay in tax.

This means there’s a greater demand for social programs, which bloats the welfare state, and leads to higher taxes.

At the end of the day, the best form of welfare is work.

We have a choice to make: we can either protect our industries from competition, and create extra private sector jobs, or we can “maximize efficiency” and then use the gains to support the chronically unemployed.

Frankly, it’s a stupid trade that benefits the few at the expense of the many.

Second, by trading with developing countries, and running massive trade deficits with them, we’ve expanded their economies at a blistering pace—one which we can’t match.

Here’s my proposition: we shouldn’t be trading with China if it benefits them far more than it benefits us.

Why?

Because this just narrows the economic, and power differential between us—do we really want a powerful rival? No, but that’s what we made. We enriched China to the point that they can challenge our hegemony in East Asia.

Machiavelli would be ashamed.

Globalization Impacts America’s National Security

Globalization has resulted in massive trade deficits, since it’s so much cheaper to buy from abroad than it is to make it at home.

This causes lots of problems, but one no one discusses is called import dependency, which just means that a country depends on foreign imports, without which its economy, or sectors of its economy, would collapse.

If a country’s food supply, or oil supply etc. is controlled by foreigners, they have lots of political leverage over you.

This is why, for example, Saudi Arabia wields such influence in Washington and the UN: the fact that they control much of the oil supply means that we have to placate them.

If we were energy-independent, we wouldn’t be forced to kowtow to the House of Saud.

George Washington recognized this problem in the Revolutionary War: America’s dependence on France for weapons put them in a precarious position—and it’s why his second piece of legislation was the Tariff Act of 1789, which designed to wean the US off British exports.

As Washington stated, a nation must be self-sufficient if it is to be politically free:

A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies…

It’s a damn shame we forgot history’s lessons.

Economic Globalization Has Failed America, And Hurt The West

At the end of the day, economic globalism isn’t a policy, it’s a tool. It’s a means to an end.

Comparative advantage, and free trade, have limits.

We need to stop misapplying comparative advantage to inapplicable domains.

Sure, globalization’s brought many benefits, but that doesn’t mean it’s universally beneficial. There are benefits, but also significant negatives that we shouldn’t ignore.

If our goal is to create a prosperous society that works for everyone, we need to look beyond the black and white dichotomy created by free-trading ideologues, and realize that reality, and history, doesn’t match our models.

We need a coherent, focused national economic policy, designed to drive growth and spur technological innovation.

This is the key to success.

Otherwise, we’ll head further down the path to economic collapse.