Questions: Globalization: Expanding Networks, Trade, and Interdependence

Question 1

What was the 'first wave of globalization,' and when did it occur?

• A. The ancient Silk Road and Indian Ocean trade, roughly 200 BCE to 1450 CE
• B. The period of European colonial expansion, roughly 1492-1700
• C. The late 19th century (roughly 1870-1914), when steamships, telegraphs, and the gold standard enabled high levels of international trade, investment, and migration
• D. The post-WWII period, when GATT and Bretton Woods institutions established the rules for international trade

Answer: (C)

Historians identify the late 19th century (roughly 1870-1914) as the 'first wave of globalization,' characterized by unusually high levels of international trade (as a share of GDP), capital flows, and labor migration. Steamships and railroads dramatically reduced transportation costs; the telegraph enabled rapid international communication; the gold standard provided stable exchange rates. By 1913, international trade as a share of world GDP was comparable to 1990s levels — higher in some sectors. Migration was also enormous: 60 million Europeans emigrated between 1820 and 1920. This first wave collapsed with WWI and the Great Depression, replaced by protectionism and nationalism. The post-WWII 'second wave' rebuilt globalization on new institutional foundations.

Question 2

The WTO (World Trade Organization) primarily benefits all member countries equally by establishing neutral trade rules.

• T. True
• F. False

Answer: False

The WTO, like its predecessor GATT, has been criticized for reflecting power asymmetries in its rules. Wealthy countries have been more successful at negotiating rules that protect their interests: agricultural subsidies that wealthy countries use extensively are permitted (protecting US and EU farmers); intellectual property protections (benefiting wealthy country pharmaceutical and technology companies) are aggressively enforced; but labor standards (which would constrain developing country competitive advantage from low wages) are excluded. 'Tariff escalation' — where raw materials face low tariffs but processed goods face higher tariffs — protects wealthy country manufacturing while limiting developing countries' ability to move up the value chain. The WTO's dispute settlement mechanism is also more accessible to wealthy countries with the legal resources to use it. This does not mean trade liberalization has no benefits, but the institutional architecture of globalization reflects bargaining power, not neutral principles.

Question 3

What is the 'China shock' in labor economics, and what did it reveal about globalization's domestic distributional effects?

Model answer: The 'China shock' refers to the economic disruption caused by China's entry into the WTO in 2001 and the subsequent rapid expansion of Chinese manufacturing exports to the US and other wealthy countries. Economists David Autor, David Dorn, and Gordon Hanson documented that US regions most exposed to Chinese import competition (through local industries that competed directly with Chinese goods) experienced sharp declines in manufacturing employment, wages, and broader community economic health — and that these effects were more persistent and geographically concentrated than standard trade models had predicted. Workers displaced from manufacturing did not simply move to other industries as trade theory suggested; they often faced long-term unemployment, disability, opioid use, and mortality. The China shock research demonstrated that globalization's benefits (lower consumer prices, efficiency gains from specialization) were spread broadly while its costs (job losses) were concentrated in specific communities that had little capacity to adjust. This distributional finding helps explain the political backlash against globalization in former manufacturing regions of the US Midwest and UK.

The China shock research was influential because it used detailed geographic variation in import exposure to identify causal effects that aggregate statistics missed. Standard trade models predicted adjustment costs would be temporary and modest; the research showed they were persistent and severe in specific places. This undermined the argument that free trade is Pareto-improving (everyone benefits) and showed it is better described as producing aggregate gains with concentrated losses.

Question 4

What is 'offshoring' and how does it differ from 'outsourcing'?

• A. Offshoring and outsourcing are synonyms — both mean moving production to another country
• B. Offshoring means moving production to another country (regardless of who owns it); outsourcing means contracting production to a third party (regardless of where they are located)
• C. Outsourcing means moving production to another country; offshoring means contracting to a domestic third party
• D. Offshoring refers to moving financial assets to tax havens; outsourcing refers to moving production

Answer: (B)

These terms are often confused. Offshoring is a location decision: moving production (or any business function) to another country. A company can offshore while keeping production in-house (e.g., Apple's own manufacturing operations in China would be offshoring). Outsourcing is a make-or-buy decision: contracting work to a third party rather than doing it internally. A company can outsource domestically (e.g., contracting a US call center to a third-party firm) or offshore domestically (moving production to another country but keeping it in-house). The combination — offshore outsourcing — means contracting to a third party in another country, which is what companies like Nike do with their manufacturing. The distinction matters because the drivers and consequences differ: offshoring is primarily about labor and regulatory cost differences between countries; outsourcing is about organizational efficiency and core competency.

Question 5

Has globalization reduced poverty in developing countries, and how should we assess the evidence?

Model answer: Globalization has been associated with substantial poverty reduction globally, primarily driven by China and East Asia. The number of people in extreme poverty (under $1.90/day) fell from roughly 1.9 billion in 1990 to under 700 million by 2015 — a dramatic decline. Export-led growth in China, Vietnam, Bangladesh, and other developing countries lifted hundreds of millions from poverty through manufacturing employment that paid more than subsistence agriculture. So the evidence for poverty reduction associated with globalization is real and significant. However, the relationship is complex. Much of the poverty reduction concentrated in East Asia, while sub-Saharan Africa saw slower progress. Within countries, globalization increased inequality even as it reduced absolute poverty — growth benefited urban manufacturing workers more than rural subsistence farmers. The benefits of globalization were also contingent on specific policy environments: countries that used industrial policy to develop competitive industries (rather than simply opening markets) generally performed better than those that did not. The nuanced answer is: globalization has reduced global poverty, but not uniformly, not through free markets alone, and often with increased inequality as a side effect.

This question illustrates the importance of disaggregating 'globalization' into specific policies and contexts. The blanket claim that 'globalization reduces poverty' is too simple; the blanket claim that 'globalization increases poverty' is also too simple. The reality is heterogeneous — it depends on what type of globalization, under what institutional conditions, with what accompanying policies.