Globalization – Good or Bad?

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Any discussion of globalization and its effects needs to recognize that a country comprises both producers and consumers. Producers are businesses whereas consumers are J6P (Joe Six Pack or Jane Six Pack aka common man / woman).

While import of cheap goods from China might cripple American manufacturers, it is a positive for American consumers because they save money. Just to be clear, “goods from China” includes both products of American brands made in China (e.g. Apple) as well as those of Chinese brands made in China. While 70% of goods in the shelves of supermarkets of USA are made in China, less than 10% are Chinese brands.

To take this quandary to the next level, consider the situation when the cheaper Chinese goods are not end consumer items in America but raw material for producers in USA. With cheaper inputs, local manufacturers can increase their market, boost their profit, raise wages, provide greater employment, and thereby boost GDP, yada yada yada. While some American manufacturers will shut down, other American manufacturers will prosper.

High tariffs on imports from China can drive two behaviors with opposite outcomes.

  1. American Importers pass on the higher cost caused by tariffs to American consumers. This will help improve the competitiveness of American manufacturers but at the cost of increasing prices for American consumers.
  2. Fearing loss of American market, Chinese exporters reduce their prices by either working on a lower marign or getting subsidies from their government. As a result, even after tariffs, the cost to American importers will not go up. This will keep the end consumer prices unchanged but will not help improve the competitiveness of American manufacturers.

No one knows which way tariffs will go but, if history is any indication, the second route is more likely. The last time USA levied tariffs on imports from China, it failed to save American manufacturers because Chinese manufacturers evaded tariffs by resorting to rampant transshipment via Thailand and other non-tariff countries (Source: NPR Planet Money podcast entitled “The trade fraud detective“).

When David Rashid took over US autoparts maker Plews and Edelmann, the company was losing business to its Chinese rival, Qingdao Sunsong. Both companies make power steering hoses, but Sunsong was offering its hoses to retailers at a much lower price. Then, in 2018, the Trump administration threw companies like Rashid’s a lifeline, by announcing tariffs on a range of Chinese goods, including some autoparts. Rashid thought the tariffs would finally force Sunsong to raise its prices, but, somehow, the company never did.

A similar logic applies to outsourcing of IT to companies in low cost economies like India. While offshoring kills local jobs and is thus negative for local workers in USA, it’s positive for American companies – it helps them strike the right price-performance ratio for their technologies, optimize their P&L and maximize shareholder value (MSV).

When Donald Trump appointed Sriram Krishnan as Senior Policy Advisor for AI at White House, MAGA dunderheads totally lost it. X fka Twitter was full of rants about how Indians have invaded USA and taken over all tech jobs.

My take was USA enjoys tech hegemony all over the world including India, so America should accept tech worker hegemony of India all over the world including USA. If USA bans immigration of H1B and other Indian labor, India could ban American software products from Microsoft, Oracle, and Salesforce.

In short, globalization is a two-way street or a no-way street.

There’s enough ammo for both supporters and opponents of globalization.

One way to break out of it is if citizens are willing to pay a higher price for locally produced goods in the early days of local manufacturing, even if it results in inferior quality, under the belief that quality will improve with time. I believe this consumer behavior in the sixties through eighties led to the massive growth of the manufacturing industry in South Korea and Japan.