How Mainstream Globalisation Destroys Small Economies
- Large Home Market Advantage
- No Trade Barriers
- Homogenised Regulations
One or a combination of these factors are not destructive it is when all three factors are implemented is when the damage is done.
- Large Home Market Advantage – Manufacturers from large home markets have an advnatage over companies based in smaller countries due to the economies of scale.
- No Trade Barriers – Individual countries can apply tariffs to protect home businesses, free trade obviously takes away this ability.
- Homogenised Regulations – The first two points are not by themselves destructive to manufacturers based in smaller countries. A competitive business can overcome these factors but when the open borders come with strings attached these potentially positive aspects become wholly negative.
No longer can governments in the smaller countries implement manufacturer friendly policies that can overcome the advantages that manufacturer in larger countries inherently posses.
Take the European Union as an example. In joining the EU free trade area, countries are handicapped as they all have to adhere to the same employment regulations and broadly similar tax systems, for example maternity pay and VAT levels.
No longer can the smaller countries reduce their taxation to give their home companies an advantage.
No longer can governments in smaller countries give their businesses more flexible working arrangements than businesses in the larger countries.
The increasing rigidity of employment regulations is hailed as a civilising aspect of the European Union when the reality is the opposite. The economic freedom of the citizens is reduced not increased.
Employment regulations can not alter economic reality in a positive way. Positive developments in the economy can only come from the businesses inside that economy or to put it another way, positive developments can only come when the market is allowed to discover the actual price of labour and resources.
Government interference, regardless of how well intentioned it is, can only distort the price discovery mechanism which will always lead to negative outcomes for the people.
Positive developments in general wages and working conditions can only come with reduced interference of central planners.
Increasing wages, less unemployment and better working conditions can only come from higher competition between businesses for labour.
With central planning, improved working conditions for those who can find work and an increased level of unemployment is the only possible outcome.
By definition, employment regulations that are set by central planners are in direct opposition to the market.
And this takes us back to how globalisation, at least globalisation which is defined by open borders tied to centrally planned regulations will lead a centralisation of economic wealth at the expense of people living away from the regions where the central planners are based.
Open borders and free trade open up huge possibilities to all people and to all companies inside the free trade area. It is only when the membership of the trade area comes with conditions that homogenise the business regulations of the member states that free trade and globalisation has a negative effect on the people and businesses on the periphery of the of the.
Let us look at a simple example. A German car manufacturer.
Pre EU it would be logical for a German manufacturer to set up a factory in Greece. The Greek government could quite easily make this happen through tariffs.
With open borders it no longer makes sense for the German manufacturer to run a separate factory in Greece. No tariffs leaves only the economies of scale as the deciding factor on factory location. With a relatively small country of 10 million people the decision becomes a no-brainer. The additional transport costs do not overcome the massive cost savings by only having to run one factory instead of two.
Were the free trade area to come without string attached the Greek government could reduce VAT to a level 15% lower than in Germany (as an example) allowing Greek workers to be paid 15% less than their German counterparts while still having the same purchasing power.
But the strings that come attached with the dominant version of globalisation that we see in the world today eliminates the ability of governments in smaller companies to make their home businesses competitive with the business in the larger countries. And it is the larger countries which inevitably host the central planners of these free trade areas.
Globalisation ie globalisation which is simply free trade has massive benefits for everyone, however the dominant version we see in the world today, in the EU for example, which comes with strings attached is inevitably destructive to small countires. It allows the larger companies to carry their inherent competitive advantages into new markets and ensures that the hands of the governments in these smaller markets have their hands tied , stopping them from giving their home businesses a level playing field with their larger competition from outside the country.