The holiday season is a good time to take stock of the many things for which we are thankful. This year the authors would like to publicly express their gratitude for globalization.
Globalization is the name given to a trend in which nations reduce barriers that have long prevented the world’s estimated 6.4 billion people from establishing closer ties — be they personal or economic in nature.
Improving close business and human relationships among the world’s people has serious implications. The noted French legislator Frederick Bastiat once said, "If goods don’t cross borders, troops will." The point is that war and other violent use of force should be made prohibitively expensive through voluntary commercial exchanges. If you have personal or financial investments around the world you will be less likely to agitate for war.
In his book "In Defense of Global Capitalism," Johan Norberg explains that in a free economy, "People create prosperity, not by annexing land from another country, but by carrying on trade with that land and its resources." For example, the 1990s brought an increase of 21 free countries around the globe and "major conflicts . . . fell from 20 to 13 between 1991 and 1998," writes Norberg. Nine of the 13 were out of Africa, the least familiar with free trade and market capitalism continent on earth. These numbers are not coincidental.
Studies have consistently found a "Capitalist Peace" among the wealthy nations of the world. Columbia University political scientist Erik Gartzke has explained that democratic nations also happen to be more economically free, so it can be difficult to determine which is more influential to peace. But Gartzke notes that when both variables — economic freedom and democracy — are factored into statistical models, economic freedom is shown to be "50 times more potent" in encouraging peace than democracy.
"Peace on Earth" is not the only reason to allow free trade across international borders. Studies consistently show that people who live in open, trade-friendly economies have superior standards of living.
In May 2005 two researchers from the Institute for International Economics reported that, as a result of lower barriers to trade and investment, and lower costs of moving information and goods, the average household income in the U.S. is $10,000 higher today than 50 years ago.
Despite Michigan’s recent economic woes, in 2004 it exported $35 billion worth of goods and services to the world, ranking it fourth among the states, up from sixth place in 1998.
This is not the only good news about international trade and investment. A study published by the National Bureau of Economic Research in its journal NBER Digest last August reported that U.S. multinational firms that made investments overseas increased their investments at home as well.
The study’s authors, Harvard scholars Mihir Desai and C. Fritz Foley, and University of Michigan economist James Hines, estimate that capital expenditure invested in foreign countries by affiliates of U.S. firms was associated with $3.50 invested domestically by the same companies. Their findings may indicate that capital invested overseas does not necessarily result in less capital invested domestically.
Another benefit is the increased investment by foreign firms on U.S. soil: Toyota, Honda, Mercedes, Hyundai and Nissan have all made investments in the United States. It is possible that such investments would not have occurred without lower trade barriers. But the blessings of open economies are not limited to peace and profit. The world’s overall culture is arguably enriched, too.
In Michigan, critics of globalization point to domestic job losses as just one reason to fear greater international competition. The Delphi bankruptcy is a recent symbol; but it is not a good one. Competitive pressure from abroad is only one variable in that company’s decline. The ultimate question regarding globalization is "Are nations better off in net terms thanks to a global economy and greater human interaction?" We believe the answer is a resounding "yes."
Economists disagree on many things, but they almost all applaud open trade. The world’s steady march toward greater economic competition, consumption, and peaceful exchange is nothing to be feared. Indeed, greater globalization, not less, would be the perfect foundation to a Happy New Year.
Michael D. LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Steven Thomas is a Mackinac Center adjunct scholar. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.