Globalization Policy (2/2): Winners, Losers, And Solutions
Who gets richer from globalization?
Globalization, in fact, has a side effect: inequality increased in most countries following a decrease in tariffs. This includes both wage inequality between groups of workers and shifts of profits to highly productive firms at the expenses of smaller enterprises.
Trade openness was creating winners and losers within each country. In other words, the gains created by free trade were greatly benefitting some people at the cost of most. This justifies a political economy story behind protectionism, that in a Ricardian world would be completely irrational, where losers oppose to trade and winners promote it.
What is the solution, then? Could impeding trade be beneficial? Trade does increase the amount of resources in all countries. Giving it up also means giving up that extra wealth. Then, what is the solution? If we are able to recognize who loses from opening to trade, we can compensate them. The solution is redistribution.
In order to effectively redistribute, we need to understand who wins and loses, and how it happens. Melitz (2003), in one of the seminal contributions to the topic, picks up that challenge by looking at the supply side of the economy. He shows that when trade is opened, low cost producers are able to enter the domestic market driving less efficient firms out of business.
The resources dismissed by closing firms can be re-employed by the surviving enterprises, more productive, increasing their production and sales. Business anecdotes confirm this story of the differential effects of trade on firms profitability depending on their starting point.
The country is overall more productive, a desirable effect. At the same time the owners of the firms that are closing due to the spike in competition and their workers that have been laid off must not be ecstatic about the change. The challenge, then, is combining this efficiency of globalization with fairness and economic inclusion.
Some economic actors are better positioned to take advantage of low barriers to trade. Multinational firms, for instance, can move production to low-wage countries, while workers are passive recipients of such decisions.
Then, how do multinational firms navigate this system ensuring they are on the winning spectrum?
References
Dix-Carneiro, R. (2014). Trade liberalization and labor market dynamics. Econometrica.
Feenstra R. (2004). Estimating the effects of trade policy. University of California, Davis, Department of Economics Working Papers.
Grossman, G. M. and Rossi-Hansberg, E. (2008). Trading tasks: A simple theory of offshoring. American Economic Review
Kaplinsky, R. (2000). Globalization and unequalization: What can be learned from value chain analysis? Journal of development studies.
Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica.
Menezes-Filho, N. A., & Muendler, M. A. (2011). Labor reallocation in response to trade reform (No. w17372). National Bureau of Economic Research.
Milberg, W. and Winkler, D. (2013). Outsourcing economics: Global value chains in capitalist development. Cambridge University Press.
OECD (2013). Interconnected economies: Benefiting from global value chains. Technical report. Meeting of the OECD Countries at the Ministerial Level. Paris 29-39 May 2013.
Ricardo, D. (1817). On the Principles of Political Economy and Taxation. London
Wood, A. (1994). North-South Trade. Employment and Inequality.
About the Author
Maria Carnovale
A Public Policy PhD Candidate at Duke University, Maria was trained as an economist at Università Bocconi in Milan, Italy. She studies environmental policies and trade policies related to global value chains.
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