Three waves of globalization - DOC

							Comparative advantage  Country A produces bananas at lower cost than country B; country B produces televisions at a lower cost than country A  There are potential “gains from trade” if country A exports bananas and imports tvs and country B exports tvs and imports bananas (because more of each can be produced holding resource endowments constant)  With free trade, countries will specialize in goods that are relatively cheaper for them to produce = comparative advantage This holds only if transportation costs are less than potential gains from trade (graph)

First wave of globalization: 1870-1914  Triggered by a combination of falling transport costs (e.g., switch from sail to steamships, railroads) and reduction in tariff barriers  Opened up the possibility of using abundant land  Production of and-intensive primary commodities  People immigrated to these countries and capital was invested in manufacturing in these countries  Land-abundant countries: Argentina, US, Australia, New Zealand  Labor exporting countries: European countries, others Protectionist policies: 1914-1945  These are policies that seek to increase domestic demand for own products by reducing imports and increase domestic supply by reducing export of capital to other countries o Example: import tariffs  Post-WWI economic depression led countries to institute protectionist trade policies

Second wave of globalization: 1945-1980  Transport costs continued to fall  Trade liberalization began after WWII  By 1980, trade between developed countries in manufactured goods was free of barriers  Barriers facing developing countries were removed only for those primary commodities that did not compete with agriculture in developed countries  Most developing countries still had trade barriers in place  Consequences: o Led to agglomeration economies in manufacturing production in developed countries o Redistribution of manufacturing within developed countries to lower wage areas

Third wave of globalization, 1980-present  Many developing countries broke into the global markets for the first time (include China, Bangladesh, Sri Lanka, India, Turkey, Morocco, Indonesia, Philippines, Mexico) o Between 1980 and 1988, share of total exports of developing countries of manufactured goods increased from 25% to 80% o During 1980, share of total exports of developing countries of services increased from 9% to 17%  Why? o Changes in economic policies  many developing countries undertook major trade liberalization reforms and reduced barriers to foreign investment o Continued progress in declining transport costs (containerization, airfreight) and new information technologies (digital information is costless to ship) Current trend: marked increase in globalization of services due to information technologies  See BusinessWeek cover story from Feb 2003:
http://www.businessweek.com/magazine/content/03_05/b3818001.htm