Pros And Cons Of Globalization And Ricardo’s Theory Of Comparative Advantage

Advantages of Globalization

Question:

What is Globalisation and how does it affect domestic businesses? In your discussion, include both positive and negative impacts of Globalisation.

The term globalization refers to the interconnection of countries through belonging to a common economic and social system. It is through globalization that markets across the globe are connected and also the modes of transport and communication are all connected. Globalization has made the world a global village from the fact that people from one continent can freely move and even conducts business without necessarily having to travel to another continent through E-commerce. Globalization has made commodities cheaper than in the home country a move that saw the United States and the European markets lose significant share as a result of globalized products.

The proponents of globalization argue that there is a free trade that has the effect of promoting economic growth globally through job creation, increasing competition among companies thus enhancing high-quality products and lowering prices for commodities for the consumers (Collins 2015).

Globalization presents an opportunity for the poor countries to infuse capital and technology enabling such countries to develop economically. It is through the sharing of prosperity among such countries that the frameworks of democracy and respect for human rights get enhanced. In the past, many countries failed to achieve democracy.

Globalization has also increased the market for goods and services. It is a relief for companies that had a limited market for goods and services. In the past, companies had a problem to deal with when it came to searching for a market. But thanks to globalization, firms have now a wider market for their goods in other countries. On the other hand, consumers are relieved to form suffering from the few goods and services that limit the choice of their products.  With the advent of globalization, consumers have a variety of products to pick from also they enjoy lower prices for the same products (Collins 2015).

It is through globalization that labor mobility has been increased. People from one continent can freely move to other continents with the aim of working in such countries. Skills are freely transferable among countries. The advantage with labor mobility is the fact that firms are able to tap the best talent from other countries at reasonable prevailing wage rates.

Global companies being set up in developing nations create employment opportunities for people working in such countries thus reducing poverty levels. It is also a source of revenue for the governments in such nations through taxation.

Disadvantages of Globalization

One complaint about globalization is the fact that some countries become richer while others continue being poorer. Globalization has the effect making developed nations richer and the developing nations poorer. Globalization is a relief for the managers, entrepreneurs, and investors but on the other hand, it is starvation for the workers and the environment that gets degraded (Gandolfo and Trionfetti 2014).

Globalization has a negative implication on jobs where most jobs are lost and transferred to lower cost countries. Some of the best talents get transferred to lower countries instead of being utilized in the developed nation.

Globalization has also led dumping of products where cheap and unwanted commodities get discarded in the developing nations.

Multinational companies also relocate to other countries with a bid to enjoy the tax havens in such countries in avoiding taxes (Kemp 2011).

Products being developed overseas face the risk of being copied or stolen something for instance in countries like China such cases have been reported (Collins 2015).

Globalization has led to the spread of diseases such as HIV/AIDS by travelers to the most remote areas in the world.

Lastly, globalization has led to labor exploitation where children get used as laborers and also prisoners are forced to work under inhumane conditions. Safety gets ignored while producing cheap commodities. Human trafficking is also on the increase (Collins 2015).

David Ricardo conceptualized the idea using very simple numerical examples in his earlier works in 1817 in one of the books entitled principles of political economy. Ricardo’s law was an improvement of the law of absolute advantage. Ricardo saw two countries where one country A was advanced in every productive activity than country B then the two countries would not from trade and the theory of absolute advantage had no solution to such an answer (Costinot and Donaldson 2012).

However, with Ricardo’s theory of comparative advantage showed that such countries could still benefit from such a trade despite one country having the advantage in producing everything. Ricardo’s example of England and Portugal producing cloth and wine and labor was the only factor of production. Labor productivity varied among the countries and also industries. Ricardo assumed that Portugal was better positioned in the production of both goods (Costinot and Donaldson 2012).

Country	Wheat	Wine
	Cost per man Hours	Cost per man Hours
England	15	30
Portugal	10	15

From the above diagram, it is evident that Portugal is better at producing wine. As such Portugal is said to have a comparative advantage in wine production. On the other hand, England is relatively better in wheat production and thus has a comparative advantage in wheat production.

Ricardo’s Theory of Comparative Advantage

According to Adam Smith, a country is said to have an absolute advantage when it is efficient in producing more of the product than any other country. Smith urged countries to specialize in producing countries that they had an absolute advantage. In economics, the principle of comparative advantage arises when a country is able to produce more goods and services than the competitors using the same resources (Schumacher 2012).

In the world today, the concept of comparative advantage is more practical where there are countries have a comparative advantage in the production of some goods, for instance, Japan has a comparative advantage in steel production and for this reason, and Japan specializes in vehicle production compared to other countries in the world. However, with the absolute advantage, there are limitations in terms of its practicality where there are some countries that have an absolute advantage in the production of all goods. In such countries, it would be difficult to conduct trade since they produce everything relatively cheap and more goods at the same time. It is for such reasons that the theory of absolute advantage was improved by Ricardo through a more conventional approach of comparative advantage.

A tariff is a tax imposed on goods and services either entering or leaving the country. In most cases, a tariff is meant to alter the balance of trade so as to ensure favorable terms of trade in favor of the country. For instance, a tariff on imports is meant to increase the cost of imports thus discouraging imports and favoring the local products.

Tariffs are used in most cases to protect domestic industries that are in the initial stages from the external competition. President Trump may feel that there is need to shield the local industries from exploitation. The tariff acts as a protector by buying time that enables the firm to develop and grow into a competitive position (Hoffman 2016).

President Trump may want to impose tariffs in a particular segment of the American economy that provides sensitive products. Some industries are strategic more so n in the provision of weapons such as guns and warfare weapons to avoid international conflict with the Chinese suppliers and providers (Hoffman 2016).

Chinese products are known of flooding the United States market. It is the international competitors that employ aggressive tactics aimed at gaining market share that puts domestic producers out of competition and market. Mr. Trump may, therefore, advocate for tariffs to mitigate the effects of Chinese products employing unfair tactics.

Mr. Trump and his government will use tariffs in diminishing consumption of Chinese goods that do not adhere to the American environmental standards (Hoffman 2016).

The Republican adopts policies that are aimed at creating job opportunities for the many citizens of America. In the case that domestic industries are unable to compete favorably with the Chinese firms, then the government will impose tariffs to discourage imports and encourage consumption of local products. The overall effect is that more jobs will be created thus enhancing job growth (Hoffman 2016).

The American consumers of the Chinese products may be worse off as a result of the tariff. The tariff has the effect of raising the price of imported products and the domestic substitutes thus reducing the surplus that should be enjoyed by the consumer in the market. Supply of the imported commodity gets reduced as a result of increased costs in terms of tariffs. Suppliers always cut the quantity supplied with the introduction of taxes or tariffs decrease with supply means that less of the product is available and whenever supply is less there will be high prices for the commodities.

Tariffs will impact on the consumer negatively as only a few commodities are available to choose from. The consumer has a limited variety thus limiting the choice of preference. Tariffs also reduce the purchasing power of the consumers as imports become expensive making the consumer purchase fewer quantities and also disposable income becomes less as money can only purchase few goods and services.

References

Collins, M. (2015). Forbes Welcome. [online] Forbes.com. Available at: https://www.forbes.com/sites/mikecollins/2015/05/06/the-pros-and-cons-of-globalization/#15020c09ccce [Accessed 2 Aug. 2017].

Costinot, A. and Donaldson, D. (2012). Ricardo’s theory of comparative advantage. Cambridge, Mass.

Gandolfo, G. and Trionfetti, F. (2014). International trade theory and policy. Heidelberg: Springer.

Hoffman, G. (2016). The Importance Of Imposing Tariffs On Imports – International Media Project. [online] International Media Project. Available at: https://www.incaproject.org/importance-imposing-tariffs-imports/ [Accessed 2 Aug. 2017].

Kemp, M. (2011). International trade theory. London: Routledge.

Schumacher, R. (2012). Adam Smith’s theory of absolute advantage and the use of doxography in the history of economics. Erasmus Journal for Philosophy and Economics, 5(2), p.54