Globalization, Trade, and Interdependence

International Journal of Economics
and Financial Research
ISSN(e): 2411-9407, ISSN(p): 2413-8533
Vol. 3, No. 10, pp: 202-205, 2017
URL: http://arpgweb.com/?ic=journal&journal=5&info=aims
202
Academic Research Publishing Group
Globalization, Trade, and Interdependence
Hany H. Makhlouf , Ph. D Professor, School of Business and Public Administration, University of the District of Columbia,
Washington. D. C.
1. Introduction
Economic interdependence and interconnectedness have a far reaching impact on economic stability and growth
in many nations. As trade and investment barriers have come down during the course of the second half of the
twentieth century, many countries started to have greater access to each other’s markets. New opportunities for trade
and net trade creation have emerged like never before in history (Tananyiwa and Hakuna, 2014). As a result, world
trade has risen consistently over the last several decades to an unprecedented level, reaching $19 trillion in 2014,
according to the World Trade Organization (Higott, 2001); (World Trade Organization, 2016). The increase in trade
has, in turn, led to growth in many trading partners’ gross national products (GNP) and in their employment figures,
and has encouraged foreign direct investment (FDI) flows, modernization of the foreign trade infrastructures
including international shipping capacities, changes in styles of living due to the emergence of new industries and
global brands, and, thus, more economic interdependence (OECD et al., 2010). As evidenced by histrionic
experience, Martin (2001) further stresses the strong link between trade and economic growth, stating that “most of
the countries that have grown the fastest have done so with rapid increases in their participation in world trade” (p.
1).
Describing the extent of change in world trade, Higott (2001) indicates that “between 1959 and 1966 (for
example) ….merchandise trade expanded 16-fold” (p. 131). The world Trade Organization (WTO) also reports that
international trade has been rising at an average of eight per cent a year over the last several decades, thanks to
continued economic growth and liberalization of trade and investment (p. 2). In regard to the globalization of
finance, Daniels (2012) also observes that integration of the international financial system has even exceeded the rise
in the flow of trade, stating that “money is (now) able to move across globalized regions quite fluidly” (p. 4).
Despite the growth in the overall flow of goods and cross- border financial transactions, however, some nations
and regions have lagged behind the rest in their trade and in improving the quality of life of their citizens. The
benefits from open trade have not in reality been shared equally or fairly among all world trading partners. Smaller,
weaker, and poorly managed economies have been particularly vulnerable to imbalances in their trade and financial
flows, declining terms of trade, and external shocks that have necessitated excessive reliance on foreign debts, and
painful economic restructuring and austerity measures. As Daniels (2012) indicates, “most LDCs have seen little
benefit from the globalization of the finance industry …. (as) the deep integration of the financial industry has
occurred mostly with a persistent global triad: North America, Europe, and East Asia” (p. 3-4). Taking into account
the economic and, particularly, trade conditions and differences among different nations, this paper examines the
impact of open trade and interdependence from the perspectives of different groups of nations, mainly the developed
and the least developed ones. A question to be addressed is: What makes some nations winners or losers in the
current international trade and financial systems?
Abstract: During the course of the second half of the twentieth century, the world economy has become
increasingly interdependent as a result of the economic liberalization measures that have been taken by many
countries, and the bilateral and multilateral trade promotion and cooperation agreements that have been reached
by a majority of trading partners around the world. However, the benefits from the growth in international trade,
and economic cooperation and interdependence, have not been shared equally by all nations. Some have
benefited more than others, and some have lagged behind due to their inability to compete in a broader and
increasingly dynamic global market. This paper examines the impact of economic interdependence from the
perspectives of different national groupings, particularly the developed and the least developed countries. One of
the questions to be addressed is: What factors contribute to the differences among those nations in taking
advantage of open trade and capital mobility? It is expected that this study would be of value to economic
planners and to students of international trade and globalization.
Keywords: Globalization; Liberalization; Multinational corporations; Supply chains; Foreign direct investment (FDI).

International Journal of Economics and Financial Research, 2017, 3(10): 202-205
203
2. Pros and Cons of Economic Interdependence
Proponents of globalization point to the benefits that come with trade and financial interdependence, including
the benefits from efficiencies that are obtained from economies of scale, specialization among trading partners,
product standardization and the increased competition among trading partners. As Surugiu and Camelia (2015)
explain, “interdependence is occurring due to the specialization of countries ….An example of such interdependence
is found in the European Union with countries having a degree of specialization that is due to factors such as labor,
capital, culture, etc.” (p. 133).
Supporters of globalization and the increased volume of trade and interdependence also associate trade with
economic development. Todaro and Stephen (2009), for example, state that “trade can be an important stimulus to
rapid economic growth. This can be amply demonstrated by the successful experiences of countries like China, ….
Singapore, and South Korea” (p. 615). Those countries have transformed their economies by successfully
implementing diversification and export-led growth strategies.
Despite the record of trade growth that is attributed to the lowering of trade barriers and the resulting growth in
economic interdependence among major players in international trade, a barrage of criticism of globalization and
open trade takes place at meetings of international financial institutions and whenever world leaders meet to assess
the state of, and progress in, the world economy. Those critics bring attention to some direct and some collateral
damage from open trade and the increased financial integration and interdependence, particularly in regard to the
status and role played by large, highly integrated, and profit-driven multinational corporations. Some see the
interconnectedness in the global trading system as a primary cause behind the fast spread of economic problems
from one or a few nations to the rest, as the Great Recession of 2008-2009 has demonstrated. In that case, the
financial crisis that began in the banking sector in United State spread globally and to other sectors within a short
period of time, and “plunged the global economy into the deepest recession since the early 1980s” (Hill and Thomas
Hult, 2017).
Spence (2011) indicates that interconnectedness that results from globalization can not only affect entire
countries, but also “some subgroups within… countries, including the advanced economies” (p. 41). It has long been
recognized also that getting into a state of dependence on the foreign trade sector of the economy (importing and
exporting) as the primary source of strategic and basic societal needs, of national revenues, and of jobs, can have
serious adverse economic and foreign policy implications. This has been the case with smaller and weaker
economies throughout history, but has become more so, with the sharp increase in the volume and variety of
products traded at present and in recent history.
3. Perspective of Developed Economies
It is generally realized that the economically advanced countries have been the main beneficiaries of
globalization and of interdependence. As their economies recovered from the devastating effect of WWII,
International trade between them grew faster than their trade with developing countries, whose low incomes did not
allow them to import many things and whose exports were mainly commodities and primary goods (although
developing economies are now an important destination of developed countries exports of high technology and other
products) (Balassa, 1984). Since the world’s largest western economies were the initiators and primary promoters
of the current wave of globalization, and along with the international financial and trade institutions they have
created, they have been the main force in setting trade and finance liberalization rules, while the rest of the nations of
the world have remained as rule- takers, and many of them are still trying to economically catch up with them.
However, many of those advanced economies have not been able to completely, and forever, avoid some of the
unintended negative consequences of the mobility of resources, and shifting production and trade patterns; and some
of them have remained protective of some of their economic sectors, like the agricultural sector, by subsidizing
domestic producers and limiting agricultural imports to lessen competition for their agricultural products (Balassa,
1984).
The loss of some manufacturing jobs in some developed countries due to capital mobility, offshoring and the
movement of some manufacturing plants by multinational corporations to low- wage countries has become a
political issue in those countries. Thus, some labor unions and political leaders in the United States and the United
Kingdom, for example, have started to call for slowing down the pace of globalization or, at least, managing it better.
Some nationalists in those countries have even been calling for economic de-globalization because they associate the
loss of some jobs and manufacturing capacities to the way globalization and interdependence have been managed,
but not necessarily to globalization or interdependence per se. Stiglitz (2013), for example, argues that, “the
problem …is not that globalization is bad or wrong, but that governments are managing it poorly – largely for the
benefit of special interests” (p. xiii). He emphasizes, for example, that by allowing labor bargaining power to erode,
some workers in countries like the United States have become victims of globalization and interdependence and
capital mobility (Stiglitz, 2013). He and others also blame governments for, under the banner of globalization, have
been allowing multinational corporations to unconditionally move capital and manufacturing facilities whenever
they found that to be in their interest, without regard to the communityis economic damage and the employment
issues they leave behind (Stiglitz, 2013).
Spence (2011) also observes that employment in the post-industrial societies, like the United States, has
increased in the non-tradable sector both due to the growth of that sector and its relative immobility, as compared to
the tradable sector that has lost some jobs due to the relocation of plants and the changes in manufacturing

204
technologies. He further observes that “the employment structure of the United States economy has been shifting
…except for the upper end of the value-added chain…. (Hence) incomes are (now) high, and rising, for the highly
educated people at the upper end of the tradable sector, but they are diminishing at the lower end” (p. 30, 32, and
35). Implied by these observations is that some jobs and some manufacturing activities have been moving from some
of the advanced economies to some developing, newly industrialized and emerging economies; and with those
movements, changes in trade volumes and patterns as well as levels of interdependence continually take place.
4. Perspective of the Least Developed Countries
Some developing countries have benefited in varying degrees from interdependence. However, some have been
hurt from the lowering of their trade barriers, and the liberal opening of their markets to imports without an equal or,
close to equal, increase in their exports. The oil exporting countries, for example, have benefited substantially from
the need for their oil by the hundreds of non-oil producing nations, all around the world. They have also benefited
from the inflow of the FDI that has allowed them to export such a strategic commodity. Regarding what has
happened in some other successful developing countries, (Goldberg, 2007) points to the benefits they are realizing
from adjusting their economies in order to produce intermediate products and establish labor intensive industries
with domestic and/or foreign capital and know-how. However, not all developing countries, particularly the least
developed among them, have been successful in doing so.
Least developed countries, like some of the countries in Sub-Saharan Africa, have been facing major problems
in their efforts to diversify their economies and fully participate in, and benefit from, the changes in the global
trading system. Many of them lack the capabilities required even to exploit their natural resources to the fullest
possible extent. Most of them frequently lack the capital and the infrastructure that can accelerate their
industrialization, and allows them to have a competitive advantage in the global market. Ironically, some of those
nations suffer from a brain drain problem because many of their better educated youths seek employment in the more
developed economies (Collier et al., 2004). Furthermore, the conditions imposed by aid-givers, make it difficult for
them to take effective measures to protect their infant industries and their small modern industrial sectors (Balassa,
1984). In addition, not all developing countries have had the ability to attract enough export-boosting foreign
investment to earn enough foreign exchange to finance their imports of capital and consumer goods. Thus, from the
perspective of the least developed countries, opening their markets does not necessarily lead to net benefits in their
trade balances, and to success in economic diversification and industrial development. After looking into different
countries’ successes and failures under alternative trade policies, and the arguments of trade optimists and trade
pessimists, Todaro and Stephen (2009) have concluded that “the success of export promotion since the 1990s varies
widely from region to region and from country to country….The current consensus leans toward an eclectic view
(toward open trade policies) ….What works for one may not work for another” (p. 641).
5. Trade and Interdependence at the Regional level
Along with the globalization process that led to a great deal of economic interdependence, several geographic
regions have established free trade zones, free trade areas, common markets, and other forms of regional trade
regimes, with varying degrees of success. Those include the European Union (EU) that has 27 nations, and the North
American Free Trade Agreement (NAFTA) that includes the United States, Canada, and Mexico. Understandably,
one main objective behind establishing these regional groupings is increasing trade and investment flows among
member states and, in some cases, with other (non-member) nations. Such agreements also help in combining
operations in multiple markets to attain greater economies of scale within the region, creating regional supply
chains, promoting the efficient use of resources (through rationalization and specialization), and advancing the
sharing of the costs and benefits from adopting the latest technological advances. Thus, regional groupings are
supposed to ultimately help in increasing the flow of goods and services through economic cooperation and
interdependence at the regional level or within a limited, but a multi-nation, geographic area. As Tananyiwa and
Hakuna (2014) also observe, regional geographic groupings can help weaker economies, like those of many Sub-
Saharan African countries, that have been marginalized due to their inability to compete globally, to be individually
more competitive at the regional level (Tananyiwa and Hakuna, 2014). Ghemawat (2007) also argues that regional
agreements help in taking advantage physical proximity, which facilitates the movement of finished and intermediate
goods as well as in maximizing benefits from cultural continuity.
6. Trade and Interdependence Arguments and Counter-Arguments
Mercantilism was the predominant economic philosophy in Europe until Adam Smith published his famous
book, the Wealth of Nations in 1776, in which he called for trade liberalization, greater division of labor among
trading partners (i.e. specialization in what each nation can produce most efficiently or more efficiently than others),
and having less governmental interference in the economy; thus, allowing market forces to determine what to
produce and what not to produce. As opposed to Adam Smith’s advocacy of free trade, mercantilists saw trade as a
zero-sum game in which the gains of one nation, obtained through exports, constitute an equal loss to the importing
nation that has to pay for the imported goods. Present day free traders and globalists disagree with such perception
of trade. They see trade as a non-zero-sum game because traders can benefit, and create win-win outcomes from the
two-way flow of trade. Hence, interdependence can help, rather than hurt trading partners, and imports can have

205
multiple benefits, as exports do. In the international market, many individual nations can end up with net gains in
their economies, at least, from the importation of strategic commodities, of Items in short supply in the domestic
market, of required raw materials, and of intermediate goods that are needed for further processing or assembly.
Some of those imports can eventually generate more exports. In addition, consumers may also benefit from the
increased competition that often leads to lower prices and improvements in product quality.
7. Conclusion
Lowering trade and investment barriers over the last several decades has created a state of economic
interdependence among nation-states. Such interdependence has had positive and negative outcomes. It has led to
fast growth in world trade, lower consumer prices, more efficient use of factors of production due to their increased
mobility, and higher standards of living, among other positive outcomes. In the meantime, critics deplore the fast
spread of economic crises and problems, the increase in income inequality within and among nations, the sharp rise
of foreign debt, and the negative impact of imports on some local/domestic manufacturers and their workers. Some
nations lower their trade barriers but don’t have enough products to export in order to earn enough foreign exchange
to pay for them; thus, incurring chronic trade and payments imbalances. However, the redistribution of trade and
manufacturing among nations and continents has helped some developing countries (including China) to raise their
per capita incomes and lift millions of their citizens out of extreme poverty (Over 600 million in China alone
between 1979 and 2014, according to the World Bank).
This study reaffirms the mixed record of economic interdependence. It shows that the impact of liberalization of
trade and investment has been uneven as some nations have benefited more than others. In the meantime, some
nations and sub-national groups and economic sectors have been winners and some have turned into losers. It should
be mentioned as well that multinational corporations have been among the winners since the lowering of trade and
investment barriers has created new opportunities for them for greater vertical and horizontal integration, for growth
in revenues, and for higher returns on their investment despite the frequently repeated criticism of their economic
power and influence, and their continually growing share of the world’s output.
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