Unit 2 – THE STRUCTURES OF GLOBALIZATION

Advances in communication and transportation technology, combined with free-market ideology, have given
goods, services, and capital unprecedented mobility. Northern countries want to open world markets to their goods and
take advantage of abundant, cheap labor in the South, policies often supported by Southern elites. They use international
financial institutions and regional trade agreements to compel poor countries to "integrate" by reducing tariffs, privatizing
state enterprises, and relaxing environmental and labor standards. The results have enlarged profits for investors but
offered pittances to laborers, provoking a strong backlash from civil society. (Global Policy Forum, 2005)

What is included in the “global economy”? Those who organize and sustain it such as states and governments,
international organizations and associations; those who play a role in it like capitalists and investors, international financial
institutions (IFIs), production managers, consumers and labor; those marginal but connected to it. For instance, the global
poor, small farmers, grey and black marketers; and trans-border flows of goods, information, money, people and other
things.

Four separate lessons make up this unit on “The Structures of Globalization.”

The first lesson tackles economic globalization and identifies the global actors/international financial institutions
and explains their roles in the creation of a global economy. The lesson also focuses on international trade, the concept
of comparative advantage, and the benefits and drawbacks of free trade.

The second lesson centers on market integration, its three basic types, and the advantages and disadvantages of
each type of market integration.

The third lesson concentrates on institutions that govern international relations and the effects of globalization
on governments. The lesson also differentiates internationalism from globalism.

Finally, the fourth lesson deals with global governance, its form, format, techniques and the challenges of global
governance in the twenty-first century.
 Lesson 3: Global Economy

In This Lesson

• Discuss economic globalization.

• Identify the global actors/international financial institutions and explains their roles in the
creation of a global economy.
• Discuss international trade, the concept of comparative advantage, and the benefits and
drawbacks free trade.
• Identify the actors that facilitate economic globalization.

Image: Sputnik News

The International Economy and Globalization

from International Economics
by Robert J. Carbaugh

In today’s world, no nation exists in economic isolation. All aspects of a nation’s economy—its industries, service
sectors, levels of income and employment, and living standard—are linked to the economies of its trading partners. This
linkage takes the form of international movements of goods and services, labor, business enterprise, investment funds,
and technology. Indeed, national economic policies cannot be formulated without evaluating their probable impacts on
the economies of other countries.

The high degree of economic interdependence among today’s economies reflects the historical evolution of the
world’s economic and political order. At the end of World War II, the United States was economically and politically the
most powerful nation in the world, a situation expressed in the saying, ‘‘When the United States sneezes, the economies
of other nations catch a cold.’’ But with the passage of time, the U.S. economy has become increasingly integrated into
the economic activities of foreign countries. The formation in the 1950s of the European Community (now known as the
European Union), the rising importance of multi-national corporations in the 1960s, the 1970s market power in world oil
markets enjoyed by the Organization of Petroleum Exporting Countries (OPEC), and the creation of the euro at the turn of
the twenty-first century all resulted in the evolution of the world community into a complicated system based on a growing
interdependence among nations.

Recognizing that world economic interdependence is complex and its effects uneven, the economic community
has made efforts toward international cooperation. Conferences devoted to global economic issues have explored the
avenues through which cooperation could be fostered between industrial and developing nations. The efforts of
developing nations to reap larger gains from international trade and to participate more fully in international institutions
have been hastened by the impact of the global recession on manufacturers, industrial inflation, and the burdens of high-
priced energy.

Over the past 50 years, the world’s market economies have become increasingly integrated. Exports and imports
as a share of national output have risen for most industrial nations, while foreign investment and international lending
have expanded. This closer linkage of economies can be mutually advantageous for trading nations. It permits producers
in each nation to take advantage of specialization and efficiencies of large-scale production. A nation can consume a wider
variety of products at a cost less than that which could be achieved in the absence of trade. Despite these advantages,
demands have grown for protection against imports. Protectionist pressures have been strongest during periods of rising
unemployment caused by economic recession. Moreover, developing nations often maintain that the so-called liberalized
trading system called for by industrial nations serves to keep the developing nations in poverty.

Economic interdependence also has a direct consequences for a student taking an introductory course in
international economics. As consumers, we can be affected by changes in the international values of currencies. Should
the Japanese yen or UK pound appreciate against the U.S. dollar, it would cost us more to purchase Japanese television
sets or UK automobiles. As investors, we might prefer to purchase Swiss securities if Swiss interest rates rise above U.S.
levels. As members of the labor force, we might want to know whether the president plans to protect U.S. steel and
autoworkers from foreign competition.

In short, economic interdependence has become a complex issue in recent times, often resulting in strong and
uneven impacts among nations and among sectors within a given nation. Business, labor, investors, and consumers all feel
the repercussions of changing economic conditions and trade policies in other nations. Today’s global economy requires
cooperation on an international level to cope with the myriad issues and problems. (Carbaugh 2009)

Image:

dhsworldgeo.weebly.com
International Trade
from Edexcel Economics
by Quintin Brewer

Globalization has led to a phenomenal increase in world trade. One measure is to consider exports as a proportion
of world GDP.

The pattern of world trade has also been greatly affected by the entry of China as a major manufacturer.

The basis of free trade law: the law of comparative advantage

The law states that, even if one country has an absolute advantage in the production of all goods, it can still benefit
from specialization and trade, if it specializes in the production of goods in which it has a comparative advantage.
A country has a comparative advantage in producing a product if the opportunity cost of producing it is less than its
potential trading partner.

Say the UK take 5 hours to make cheese, and China 1. Also, the UK takes 15 hours to make cars, but China 2. China
clearly has an absolute advantage in producing both cars and cheese. However, look at the opportunity cost. The UK gives
up 3 cars if it producing 1 cheese. China gives up 2 cars if it’s producing 1 cheese. Therefore China has a comparative
advantage in cheese production. The UK gives up 1/3 a car if it produces one cheese, and China gives up 1/2. So, the UK
has a comparative advantage in car production. Therefore, the UK should specialize in producing cars, and China should
produce cheese. For trade to be beneficial, the terms of trade must lie between opportunity cost ratios. In other words,
the UK will only trade for cheese with china if the price is above 1/3 of a car, and China will only trade if it is below 1/2 of
a car.

Terms of trade = (index of export prices / index of import prices) x 100

You should note that, if opportunity costs were the same, then there would be no benefit from specialization and
trade.

However, widespread acceptance of the law of comparative advantage amount economists and the benefits of
free trade, various criticisms can be made:

▪ Free trade is not fair trade i.e. the rich countries might exert their monopsony power to force producers in
developing countries to accept low prices.
▪ The law of comparative advantage is based on unrealistic assumptions such as constant costs of production, zero
transport costs, and no barriers to trade.

Limits of free trade: the case for protectionism

The term protectionism refers to measures designed to limit free trade. Arguments supporting the need for
protectionism might include the following:

▪ To protect infant industries: this argument might be particularly relevant to developing countries that are in the
process of industrialization. Without protection, infant industries might be unable to compete because they have
yet to establish themselves and are too small to benefit from economies of scale.
▪ To protect geriatric industries: these are industries that might demand protection so that they have time to
restructure and rationalize production so that they can become competitive again. Typically, these occur in
developed economies that are losing their comparative advantage.
▪ To ensure employment protection: cheap imports might threaten jobs in the domestic economy and workers might
demand that the government takes action to limit imports.
▪ To prevent dumping: the term dumping refers to goods exported to another country below at a price below the
average cost of production. It is a form of predatory pricing and, if it can be proved, it is illegal under WTO rules.
This is one of the few arguments in favor of protectionism that can be justified under economic theory because it
unfairly distorts comparative advantage
▪ To correct a balance of payments deficit on current account: restrictions on imports might help to reduce the
imbalance of between the value of import and the value of exports. However, under the floating exchange rates
system, it is possible that this correction will happen automatically
▪ To restrict imports from counties whose health and safety regulations and environmental regulations are less
stringent: some argue that developing countries have an unfair comparative advantage because production is not
under the same laws and regulations as developed countries, so enabling them to produce at lower average cost
▪ For strategic reasons: a country might introduce protectionist policies on goods of strategic importance in time of
war so that it is not dependent on imports. Food, defense equipment and energy are items frequently used as
examples of such goods.
▪ To raise tax revenues: tariffs may be an important source of tax revenue for developing countries.
▪ In retaliation: barriers to trade may be imposed by a country because another country has restricted the imports
of its goods.
Types of protection/import barriers

There are numerous ways by which free trade can be prevented. The most common are tariffs, quotas and
subsidies to domestic producers and administrative regulations. In countries where the exchange rate is not freely floating,
the authorities might also hold down the value of the currency artificially to give their good a competitive advantage.

Tariffs

Before the tariff is imposed:

▪ the price paid by consumers is P1, domestic output is Q1, imports are Q1 to Q2.

Once the tariff is imposed:

▪ the price paid by the consumer increases to P2, reducing consumer surplus
▪ domestic output rises to Q4, increasing producer surplus
▪ imports fall to Q4Q3
▪ tax revenue collected by the government is KLMN
▪ net deadweight welfare loss is the loss in consumer welfare that is not made up for by producer welfare or
government revenue – X and Y

Quotas

Import quotas place a physical restriction on the amount of goods that can be imported. They have a similar effect
as tariffs, in that the price of imported goods will rise and domestic producers should gain more business.

However, unlike tariffs, the government does not gain any extra revenue.

Subsidies to domestic producers

Grants given to domestic producers artificially lower their production costs, so enabling their goods to become
more competitive. Subsidies therefore act as a barrier to trade
Administrative regulations

These take a variety of forms, including labelling, health and safety regulations, environmental standards and
documentation on country of origin. In effect, such regulations increase the costs of foreign producers and so act as a
barrier to trade.

The case against protectionism

There are several problems with protectionism including:

▪ Inefficient resource allocation: trade barriers distort comparative advantage and reduce specialization, which will result in
lower world output and therefore reduce living standards
▪ Higher prices and less choice for consumers
▪ Less incentive for domestic producers to become more efficient in order to compete on a global scale
▪ Difficulty of removing trade barriers. Once such barriers are introduced, it might prove to be difficult to remove them because
of the adverse effect on domestic producers (Brewer 2012)

Global Actors

A global actor refers to any social structure which is able to act and influence and engage in the global or
international system. These specific actors include:

• International Economic and Financial Organizations. International economic and financial organizations provide the
structure and funding for many unilateral and multilateral development projects. Such organizations deal with the
major economic and political issues facing domestic societies and the international community as a whole. Their
activities promote sustainable private and public sector development primarily by: financing private sector projects
located in the developing world; helping private companies in the developing world mobilize financing in international
financial markets; and providing advice and technical assistance to businesses and governments. (Lund University
Libraries, 2018)

• International Governmental Organizations (IGOs). IGOs have international membership, scope and presence. Their
primary members consist of sovereign states. These organizations bring member states together to cooperate on a
particular theme or issues that have global impacts and implications such as human rights, trade, development,
poverty, gender or migration. (Lund University Libraries, 2018)

• Media. Media are the communication outlets or tools used to store and deliver information or data. The term refers
to components of the mass media communications industry, such as print media, publishing, the news media,
photography, cinema, broadcasting (radio and television), and advertising. (Wikipedia “Media,” 2019)

• Multilateral Development Banks. Multilateral development banks are international financial institutions owned by
countries. In addition to the World Bank Group, there are four regional multilateral development banks: the Inter-
American Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank
for Reconstruction and Development. These institutions provide loans, grants, guarantee, private equity and technical
assistance to public and private sector projects in developing countries. (Lund University Libraries, 2018)

• Nation-States. Nation-states refer to a certain form of state that derives its political legitimacy from serving as a
sovereign entity for a nation within its sovereign territorial space. The state is a political and geopolitical entity while
the nation is a cultural and/or ethnic entity. The term "nation-state" implies that the two geographically coincide, and
this distinguishes the nation state from the other types of state, which historically preceded it. (Lund University
Libraries, 2018)
• Non-Governmental Organizations (NGOs). Non-governmental organization (NGO) refers to a legally constituted
organization created with no participation or representation of any government and driven. These organizations are
task-oriented perform a variety of service and humanitarian functions. Some are organized around specific issues such
as human rights, environment, gender, or health. In many jurisdictions these types of organization are defined as "civil
society organizations." (Lund University Libraries, 2018)

• Trans-National Corporations (TNCs). "Transnational Corporations exert a great deal of power in the globalized world
economy. Many corporations are richer and more powerful than the states that seek to regulate them. Through
mergers and acquisitions corporations have been growing very rapidly and some of the largest TNCs now have annual
profits exceeding the GDPs of many low and medium income countries. It is important to explore how TNCs dominate
the global economy and exert their influence over global policy making." (Global Policy Forum, 2005)

• United Nations (UN) System. The United Nations System consists of the United Nations, and the six principal organs
of the United Nations: the General Assembly, Security Council, Economic and Social Council (ECOSOC), Trusteeship
Council, International Court of Justice (ICJ), and the UN Secretariat, specialized agencies, and affiliated organizations.
The executive heads of some of the United Nations System organizations and the World Trade Organization, which is
not formally part of the United Nations System, have seats on the United Nations System Chief Executives' Board for
Coordination (CEB). This body, chaired by the Secretary-General of the United Nations, meets twice a year to co-
ordinate the work of the organizations of the United Nations System. (Wikipedia “United Nations System,” 2019)

The World’s Best Regarded Companies 2019

Below is the Top 25 World’s Best Companies in 2019 according to Forbes:

Rank Company Industry Headquarters

1 Visa Consumer Financial Services San Francisco, California
2 Ferrari Auto & Truck Manufacturers Maranello, Italy
3 Infosys Computer Services Bangalore, India
4 Netflix Internet & Catalog Retail Los Gatos, California
5 PayPal Consumer Financial Services San Jose, California
6 Microsoft Software & Programming Redmond, Washington
7 Walt Disney Broadcasting & Cable Burbank, California
8 Toyota Motor Auto & Truck Manufacturers Toyota, Japan
9 Mastercard Consumer Financial Services Purchase, New York
10 Costco Wholesale Discount Stores Issaquah, Washington
11 Apple Computer Hardware Cupertino, California
12 Siemens Conglomerates Munich, Germany
13 Kellogg Food Processing Battle Creek, Michigan
14 IBM Computer Services Armonk, New York
15 Cemex Construction Materials San Pedro Garza García, Mexico
16 Amazon Internet & Catalog Retail Seattle, Washington
17 Kraft Heinz Company Food Processing Chicago, Illinois
18 Carlsberg Beverages Copenhagen, Denmark
19 Emirates NBD Regional Banks Dubai, United Arab Emirates
20 Emaar Properties Real Estate Dubai, United Arab Emirates
21 Nintendo Recreational Products Kyoto, Japan
22 Tata Consultancy Computer Services Mumbai, India
Services
23 Samsung Securities Investment Services Seoul, South Korea
24 Volvo Group Heavy Equipment Gothenburg, Sweden
25 Electrolux Group Household Appliances Stockholm, Sweden
(Forbes 2019)