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While globalization can cause pain, it’s here, it’s with us, and it also has important benefits to our economy. As individuals, we need to turn fear into an understanding of the forces of globalization, as well as the rules and tools of international trade. That’s the subject of this final chapter.
91. GLOBALIZATION
You can buy cars made in Asia. You can buy cars made by Asian companies in America or American companies in Mexico or—you name it. You can buy a computer, smartphone, or tablet manufactured by an American company in Asia, or by a Chinese company in China or in Vietnam or wherever, and if you need help using it, you call someone in India. For that matter, if you have a question about your employee benefits, such as how your U.S.-based 401(k) plan works, you might also end up talking to someone in India.
What’s going on here? Simply, it’s the inevitable march of globalization, the ever-increasing network of economic activity around the world.
What You Should Know
Globalization happens because it can happen; that is, the technologies exist to interco
Globalization is driven by economic specialization and so-called comparative advantage. Comparative advantage is simply the idea that some economies or some productive elements within an economy can do something better, cheaper, or faster than someone else. Highly skilled labor with English-language and technology skills is available in India at a low cost. China has an enormous pool of skilled and unskilled manufacturing labor. Japan has precision engineering and manufacturing, and Taiwan has heavy industrial manufacturing like foundries and semiconductor manufacturing facilities. These companies don’t have a monopoly on these activities by any means, but they do them better than everyone else. They are leaders in the fields.
Globalization simply takes advantage of whoever can do whatever best. The natural forces of economics steer skilled software engineering and technical support to India, low-cost manufacturing to China, and precision instrument manufacturing to Germany or Japan. The networks are growing more complex, as Japanese companies now “reglobalize” some of their manufacturing to places like Thailand. It’s a naturally evolving world order, which is estimated to save us all trillions over a closed-economy scenario where trade and technology are restricted within a country’s borders.
Not everyone is behind the idea of globalization. It has obviously caused some of the painful job dislocations that have hurt American manufacturing. Many question whether saving a few pe
Globalization means change, and change can be painful. But the true benefits in terms of economic progress (yes, it helps poor economies too) and economic efficiencies ca
Why You Should Care
The news headlines and the stories you hear frequently center on the less positive effects of globalization—your neighbor gets laid off, a nearby factory closes. It probably doesn’t make the pain go away for those affected, but if you put it in the greater context of globalization and economic efficiency, and realize that comparative advantage is the most important economic driver, you can put it in perspective. You as an individual, and your employer as a company, must strive to maintain that competitive advantage in a free-market economy, else globalization becomes a risk, not an opportunity.
92. CURRENCY POLICY AND EXCHANGE RATES
“The dollar declined today against the euro and gained against the yen but held its ground at $1.04 against the Canadian dollar.”
Nice headline, but what does it mean? Sure, now my imaginary trip to Europe is a little more expensive, and it might help reduce the cost of my next new Lexus. But what’s really going on here? How—and why—do currencies fluctuate against one another?
What You Should Know
Currency fluctuations, like most things that happen in free markets, are driven by supply and demand. If the euro is up against the dollar, it reflects the fact that world currency traders feel the euro is worth more and the dollar is worth less, and so buy euros and sell dollars. The important question is: why do they feel that way?
Purchases and sales of a currency are determined by actual monetary needs at a given point of time, which are in turn driven by physical and financial trade. Physical trade refers to who is buying and selling goods and services of each country. If more people are buying European or Japanese goods or services at a given point in time, they need currency in those countries to complete the purchase, and so buy it on the open market. They may also be preparing to buy such currency by buying a futures contract. Financial trade refers to the transfer of capital to buy securities or other investments in a country, which also requires a purchase of local currency. So if euro-denominated bonds look attractive due to credit risk or higher interest rates or price stability or some combination of the three, investors will buy euros in order to buy those bonds. It’s not hard to see how these flows relate to balance of trade (see #95) and balance of payments (see #96).
Exchange rates don’t just fluctuate based on current supply and demand for a currency, but also expected future supply and demand. If a country’s economic indicators (or economic policies) signal declining production, higher deficits, more “printed” money, higher inflation, or declining interest rates ahead, currency traders will sell that country’s currency in anticipation of those events. Political and economic stability can also come into play. These sentiments can drive markets in one direction or another for a considerable period of time even though actual economic statistics and trade flows ultimately fail to support the sentiment.
Not every currency “floats” against every other; for various political reasons, some countries choose to intervene or even tightly control their foreign exchange rates. When a currency is allowed to “float,” free markets determine the exchange rates as just described, and the U.S., Japanese, Eurozone, and most other major European currencies do just that. “Floating” currency exchange rates are the “pure market.”
A country may also decide to “fix” its currency against another, often but not always the U.S. dollar. The goal is price stability in the country and stabilization of foreign trade, and it is accomplished either by direct control or intervention in the open currency markets to keep the exchange rate stable. China is the biggest and most influential user of the fixed exchange rate approach. Many U.S. policymakers and industrialists criticize this approach for they feel that the Chinese renminbi (their exchangeable currency) is too low against the U.S. dollar, which serves to stimulate their exports at the expense of making it hard for U.S. firms to compete.