Globalization (‘G11n’) means the interconnection of national economies across the world on issues such as trade, investment, labor, banking and the movement of people, goods and services. That seems like a mouthful, but it basically boils down to governments increasingly allowing their citizens do business across borders.
Globalization - An Introduction
By SHAN R
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What Is Globalization?
Globalization is not a precise term. It can mean any way that nations have become interconnected. Although far from a new phenomenon, the term “globalization” gained popularity in the 1990s. The fall of the Soviet Union created the idea of a newly interconnected world, one not divided into the Cold War’s armed camps, giving rise to globalization in the popular consciousness.
We often hear the word globalization in many contexts and repeated frequently as a concept to denote more trade, foreign companies and even the ongoing economic crisis. Before we launch into a full-fledged review of the term and its various manifestations, it is important to consider what exactly we mean when we say globalization.
Globalization is the free movement of goods, services and people across the world in a seamless and integrated manner. Globalization can be thought of to be the result of the opening up of the global economy and the concomitant increase in trade between nations. In other words, when countries that were hitherto closed to trade and foreign investment open up their economies and go global, the result is an increasing interconnectedness and integration of the economies of the world. This is a brief introduction to globalization.
Globalization is grounded in the theory of comparative advantage which states that countries that are good at producing a particular good are better off exporting it to countries that are less efficient at producing that good. Conversely, the latter country can then export the goods that it produces in an efficient manner to the former country which might be deficient in the same. The underlying assumption here is that not all countries are good at producing all sorts of goods and hence they benefit by trading with each other. Further, because of the wage differential and the way in which different countries are endowed with different resources, countries stand to gain by trading with each other.
Globalization also means that countries of the world subscribe to the rules and procedures of the World Trade Organization that oversees the terms and conditions of trade between countries. There are other world bodies like the UN and several arbitration bodies where countries agree in principle to observe the policies of free trade and non-discriminatory trade policies when they open up their economies.
Further, globalization can also mean that countries liberalize their import protocols and welcome foreign investment into sectors that are the mainstays of its economy. What this means is that countries become magnets for attracting global capital by opening up their economies to multinational corporations.
History of Globalization
Globalization as a term came to prominence in the 1980s. Although many consider this process a relatively new phenomenon, globalization has been happening for millennia. The Roman Empire, for example, spread its economic and governing systems through significant portions of the ancient world for centuries. Similarly, the trade routes of the Silk Road carried merchants, goods and travelers from China through Central Asia and the Middle East to Europe and represented another wave of globalization. European countries had significant investments overseas in the decades prior to World War I, prompting some economists to label the prewar period as an earlier golden age of globalization.
Globalization has ebbed and flowed throughout history, with periods of expansion, as well as retrenchment. The 21st century has witnessed both. Global stock markets plummeted after the Sept. 11, 2001, terrorist attacks in the United States, but rebounded in subsequent years.
Overall, however, the early 21st century has seen a dramatic increase in the pace of global integration, driven primarily by rapid advances in technology and telecommunications. In general, money, technology and materials flow more swiftly across national boundaries today than they ever have in the past. The flow of knowledge, ideas and cultures are flowing with increasing speed as well, enabled by the near instantaneousness of global internet communications.
How Globalization Factors Into Trade and Jobs
The most common form of globalization, certainly the most high profile, is foreign trade.
Globalized trade is the practice of importing and exporting products with other nations. Typically, companies do this in order to access products that they can’t find domestically, to open new markets for their products, or to find cheaper business environments through comparative advantage.
Here are these forces broken down:
Some global trade is about bringing in something that you simply can’t find at home. This is a decreasing category of trade, since technology and population movement makes it possible to produce most products almost anywhere on Earth. However, history has been powerfully shaped by trade for access, such as when European merchants would literally cross the globe for spices that only grew in Asia.
Brave men and women once died to bring black pepper to English dinner tables. Today’s equivalent might be a college sophomore hoping to sneak through customs on his way back from Amsterdam.
Some exceptions notwithstanding, most imports today are about cost. While you can create or grow almost any product anywhere, it’s often cost-prohibitive to do so. As a result, companies import.
Companies looking to export are, generally, trying to build and open new markets. This has not always ended well. On the other hand, thanks to pursuit of emerging markets, Coca-Cola (KO – Get Report) is the second most recognized word in the world.
Trade also allows companies to seek cheaper business environments, often by finding more inexpensive sources of materials and labor. For American consumers this appears in the form of products made in China, for example, or call centers moved to India. Both nations offer inexpensive source of labor, driving companies to relocate certain operations in an effort to gain an advantage over their competitors.
Global trade allows countries to specialize in products and services that they are well suited to provide. This is known as comparative advantage. It’s the process of countries using trade to buy cheaply the products it would be more expensive for them to produce, while at the same time specializing in the products they produce most efficiently.
Take, for example, NAFTA’s so-called “Auto Alley.” Its economy and currency strength makes manual labor far cheaper in Mexico than in the U.S. However, America’s education system makes it a generally excellent source of skilled labor. So American car companies do research, development and high-skill production domestically. Then they have their plants in Mexico do the labor-intensive but low-skill work. Often a car will get shipped across the border several times before it’s finished, as teams work on the vehicle wherever it’s cheapest.
This has led Mexico to capitalize on its labor-intensive workforce and a specialization in America toward a skill-intensive one, as each country takes advantage of its efficiencies compared to the other.
Technology and Globalization
World economies have been interconnected for essentially all of human history, from the Silk Road to Britain’s East India Company. By the early 20th century nations had grown so interconnected that historians and economists famously predicted the end of armed conflict because nations had grown too economically intertwined. The embarrassing end to those predictions has not stopped modern writers from repeating them.
Yet in the 21st century technology has allowed globalization to take on a more immediate presence in people’s lives than ever before.
This is due to a wide number of factors, but perhaps the two most important are telecommunications infrastructure (namely: the internet) and transportation infrastructure. Simply put, it has become faster, cheaper and easier to move products, people and ideas around the world than ever before. Individuals can access intellectual property created anywhere on their phones. Consumers can order products made almost anywhere and have it shipped to almost anywhere with few restrictions and increasingly inexpensive costs.
And companies have merged these communications and shipping technologies to create elaborate networks of production that span the globe. Swift, inexpensive shipment has made modern logistics chains such as NAFTA’s “Auto Alley” more possible than at any time in history.
Law and Globalization
Public policy has also played a major role in the expansion of globalization over the past several decades.
Most economists and major governments have come to embrace free trade as an organizing principle of global economics. While trade barriers have not disappeared around the world altogether, today they’re considered the exception to the rule. Policymakers often approach free trade as the default position unless there is a reason to make laws otherwise.
This is a change from the mercantilism of the 19th century and the 1930s when trade barriers and tariffs were the rule. In that era governments believed that the best way to encourage growth was to protect domestic industries from foreign competition. Today governments generally believe that growth is best achieved by allowing industries to operate as efficiently as possible, generally by accessing products and labor as inexpensively as the global market allows.
While the public policy issues around globalization are complex, readers should know about three subjects in particular:
Barriers are outright bans on global movement, such a trade barrier or censorship of outside ideas.
Globalization has done away with most outright trade barriers, however some few do still exist. Countries typically use them as either a political statement or in the case of perceived national security threats. The U.S., for example, tightly controls products that can be shipped to Iran or North Korea and it has only in recent years relaxed a near-total embargo on the island of Cuba.
In China, the Great Firewall is an example of a censorship barrier. It exists not to regulate or change incentives but to stop traffic altogether.
Tariffs are a tax which governments place on incoming goods and services. Critically, they are not a tax charged to the foreign government or firms. Domestic companies which import products pay tariffs and pass the cost of that tax on to the consumer.
Governments use tariffs to change the costs of imported products. Typically, these are a protectionist measure, designed to advantage domestic companies over foreign competitors by making the foreign product more expensive.
Finally, immigration controls are a form of public policy influence over globalization. By regulating the flow of individuals, governments influence the supply of skill and labor within their economy. This in turn affects how industries develop and pay scales domestically.