ECONOMIC ANALYSIS: How globalization benefits Hoosier companies

December 10, 2007

The debate on globalization most often focuses on imported goods. This is natural, for it is the sole source of pain associated with increasing international trade.

The pain accrues to workers and investors in businesses that cannot compete internationally. Of course, the net impact is positive, in part because trade reallocates workers and capital to more productive activities. These more productive activities pay better and so are ultimately better for the economy-both here and abroad. One often-overlooked element of the trade debate is the huge role exports play in the Hoosier economy.

About 7.1 percent of Indiana jobs are dependent on exporting goods overseas. Almost one in five manufacturing workers makes goods for foreign consumers.

Hoosier businesses exported more than $22 billion worth of goods last year, a more-than-50-percent increase in just four years. This represented just a bit more than 10 percent of the value of all goods and services produced in the state last year. The value of exported goods in Indiana is larger than any single major sector of our economy except manufacturing.

Indiana businesses traded with virtually every member of the United Nations in 2006. It's no surprise that Canada is our largest trading partner, receiving 44 percent of our total exports. But there's a lot more to the story.

Indiana's exporting firms are heavily concentrated in just a few manufacturing sectors. One-third of our exports are in transportation equipment. Smaller but significant export sectors include chemicals, machinery and-surprise-computers.

Not only are the types of exports concentrated, but the locations are also concentrated, which means, despite the widespread reach of exports, we send much of the same type to a smaller number of countries than most other states.

The high export concentration by industry and location means Indiana's exporting firms are sensitive to the economic conditions of their trading partners. Thus, one major impact of globalization is the need to pay close attention to economic activity in such disparate places as Canada and Portugal and India.

Exporting is difficult business. Firms that engage in commerce must wind their way through costly transportation markets and perhaps painful tariff and quota rules. The barriers to trade erected during the Great Depression have yet to entirely recede. Of course, firms that export are more productive than non-exporting firms, which allows them to absorb the additional costs of selling goods outside the state.

The story told by export firms is exactly the same as that by imports. The free and easy movement of trade across borders allows productivity-not local tariffs or quotas-to dictate the location of production. The result is that Hoosiers produce goods and services in which they have a comparative advantage. So do our trading partners. The result is to raise standards of living in all regions.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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