PILLARS OF GLOBALIZATION

Economic globalization rests on three main pillars, including international trade, foreign direct investment (FDI), and cross-border financial flows. Combined, these three forces create trillions of dollars in global commerce and other financial exchanges every year.

International Trade

The global trading system represents the sum total of international trade, and the institutions and practices that influence exchanges of products across national borders. International trade occurs when an individual, business, government, or other entity imports or exports products. An import is a product that is purchased from another country. An export is a product that is sold to another country. Trade in merchandise and commercial services increased dramatically during the 2000s. Global exports jumped from $7.7 trillion 2001 to $22.7 trillion in 2012. Merchandise trade accounted for 81 percent of all global trade ($18.3 trillion), and trade in commercial services accounted for the remaining 19 percent of global trade ($4.4 trillion). In 2012 the top five exporting nations in the world were China, the United States, Germany, Japan, and the Netherlands respectively.^[1]

International trade is a pillar of globalization because it tightens commercial connections among nations. The primary benefit of international trade is that it encourages regional specialization. That is, cross-border trade enables producers in different countries to make products best suited to local resources—natural, human, or capital—and then trade their surpluses with other nations. Economists identify this benefit as the principle of comparative advantage. By considering their comparative advantage, firms maximize production efficiency and global output. Economists acknowledge, however, that overspecialization in the production of a single good is inherently unstable. A one-crop economy is ill prepared for shifts in global demand or for supply disruptions caused by blight, drought, natural disasters, or other events.

The United States is among the world's largest participants in the global trading system. In 2012 the United States was the world's top importing nation, purchasing $2,741 billion in merchandise and services from other countries. In addition, the United States was the world's second largest exporter, selling $2,161 billion in merchandise and services to buyers in other nations. Table 12.2 shows several important categories of the U.S. merchandise trade in 2012. Note that the United States imported about twice the automotive vehicles and parts as it was able to export and imported nearly three times the amount of consumer goods than it was able to sell abroad. U.S. merchandise exports were stronger in certain industrial and capital products such as machinery, chemicals, and transportation equipment, as well as in industries that produced foods, beverages, and animal feeds.^[2]

The United States has recorded consistent trade deficits in recent decades. In fact, the last U.S. trade surplus occurred during the administration of President Gerald Ford in 1975. Historically, the overall U.S. trade deficits have resulted from significant deficits in merchandise trade, which have been only partially offset by trade surpluses in commercial

Table 12.2 Categories of U.S. Merchandise Imports and Exports, 2012

Source: U.S. Department of Commerce, Bureau of the Census and Bureau of Economic Analysis, “Exhibit 6,” News, July 3, 2013, 6 (WTO and Department of Commerce data differ slightly).

services.^[3] In 2012, for example, the U.S. merchandise trade deficit of $788 billion was coupled with a trade surplus in services of $208 billion, resulting in an overall trade deficit of $580 billion.^[4] The United States recorded merchandise trade deficits with all of its top trading partners in 2012, as shown in Table 12.3. The ranking for top trading partners is determined by the combined value of all imports and exports between the United States and another country. By this standard Canada was the top trading partner of the United States in 2012 with total trade in imports and exports hitting $617 billion. Others in the top five included China ($536 billion), Mexico ($494 billion), Japan ($216 billion), and Germany ($157 billion). Note that about 40 percent of the entire U.S. merchandise trade deficit in 2012 was with just one country—China. The United States recorded more modest merchandise trade surpluses with other trading partners, also shown in Table 12.3.^[5]

Despite the decades-long string of U.S. trade deficits, the benefits of international trade to the United States are compelling. First, trade expands the range of consumer choice by increasing the availability of goods that cannot be produced, or at least cannot be produced efficiently by domestic firms. Many commonly consumed items such as foods and beverages, clothing, electronic products, and fuels are imported from abroad. Second, trade benefits the overall economy. The U.S. Department of Commerce reported that U.S. exports supported nearly 10 million jobs in 2012 and provided business opportunities for 300,000 U.S. companies. Some of these firms produced the types of merchandise shown in Table 12.2. Others supported the fast-growing services sector, which includes royalties and license fees, and services related to management and consulting, research and development, computers and information, and the installation and repair of equipment. In all, about

Table 12.3 Largest U.S. Merchandise Trade Deficits and Surpluses, 2012

Source: U.S. Bureau of the Census, Foreign Trade Data, February 8, 2013.

30 percent of all U.S. exports in 2012 consisted of services. In that same year total U.S. exports of merchandise and services accounted for 13.9 percent of the nation's gross domestic product (GDP).^[6]

• [1] World Trade Organization (WTO), “Appendix Table 3: Merchandise Trade: Leading Exporters and Importers, 2012,” “Appendix Table 5: Leading Exporters and Importers in World Trade in Commercial Services, 2012,” Press Release, April 10, 2013, 21, 23; WTO, “Table A4. Merchandise Trade by Selected Groups of Economies, 2001–2011,” and “Table A5. Trade in Commercial Services by Selected Groups of Economies, 2001–2011,” International Trade Statistics (Geneva, Switzerland: WTO, 2012), 209–210.
• [2] U.S. Department of Commerce (DOC), Bureau of the Census and Bureau of Economic Analysis (BEA), “Exhibit 6: Exports and Imports of Goods by Principal End-Use Category,” News, July 3, 2013, 6.
• [3] Council of Economic Advisors, “Table B-103: U.S. International Transactions, 1953–2012,” Economic Report of the President: 2013, 442.
• [4] WTO, “Appendix Table 3: Merchandise Trade: Leading Exporters and Importers, 2012,” and “Appendix Table 5: Leading Exporters and Importers in World Trade in Commercial Services, 2012,” Press Release, April 10, 2013, 21, 23.
• [5] U.S. Bureau of the Census, “Foreign Trade Data,” February 8, 2013
• [6] DOC/ITA, U.S. Trade Overview 2012 (Washington, DC: DOC/ITA, 2013), 1-4.