Importance of Trade for Globalization

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Trade liberalization policies facilitate globalization.
Trade liberalization policies facilitate globalization. (Image: NA/AbleStock.com/Getty Images)

Globalization is the interdependence of countries resulting from the integration of trade, human resources, technology and cross-border investment flows. Businesses can leverage trade treaties, export support policies and a skilled worldwide workforce to plan for globalization very early in their growth stage. The importance of trade for globalization is in three areas: development of new markets, knowledge transfer and diversification.

Facts

McKinsey consultants Eric Beinhocker and Elizabeth Stephenson wrote that the level of global integration over a 15-year period from the early-1990s was quite likely unprecedented in history. Global gross domestic product, which is a measure of economic activity, grew at about 5 percent annually, while trade flows and capital flows grew at an even faster rate. The main drivers of this growth, according to The World Bank, are technological advances, which have lowered the costs of operating globally, and trade liberalization policies of developing nations. India, China and other developing countries in Asia and Latin America have become vigorous global participants after years of favoring protectionist trade policies.

New Markets

Global trade leads to an expanded addressable market for new and established businesses. International markets provide businesses with many times the consumers of their local and regional markets. Businesses can take advantage of lower labor and raw materials costs overseas to manufacture goods and provide services, thus increasing sales, lowering costs and increasing profits. However, globalization also means increased competition. Producers from low-cost countries can take advantage of trade agreements and favorable exchange rates to undercut their U.S. and European counterparts and gain market share.

Knowledge Transfer

Knowledge transfer is another important aspect of global trade. It includes not only the transfer of advanced manufacturing and processing technology to developing countries, but also the transfer of technical and business expertise. Knowledge transfer is often a two-way street. Businesses in developed countries can also learn about low-cost manufacturing techniques and local customer preferences from their business partners based in developing countries.

Diversification

Trade often forces a country to diversify its industries, just as it forces businesses to explore opportunities in multiple geographic locations and across industry sectors. Countries that rely on a few products or businesses that depend on a few customers could face severe loses if consumer preferences change, demand dries up or new competitors enter the market. Diversification does not preclude specialization, however. For example, a technology company does not have to enter the restaurant business to survive, but it should develop a broad product portfolio that appeals to customers across multiple industries.

Considerations: Rethinking Globalization

A well-functioning labor market is essential for liberal trade policies and globalization. However, even an efficient labor market could suffer dislocations, wrote University of Illinois at Urbana-Champaign professor Robert L. Thompson. Entire communities are sometimes affected by plant shutdowns and layoffs. These dislocations can lead to a rethink of trade liberalization, especially during economic downturns. Beinhocker and Stephenson note, however, that increased protectionism is likely to occur on the margins because trade barriers would lead to job losses, inflation and economic uncertainty.

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