THE GLOBALIZATION OF

ECONOMIC RELATIONS
ECONOMIC GLOBALIZATION

• a historical process
• a result of innovation and technological progress
• refers to the increasing integration of economies around the world through
movement of goods, services, and capital across borders
• the movement of people (labor) and knowledge (technology) across
international borders (IMF, 2008)
INTERCONNECTED DIMENSIONS OF
ECONOMIC GLOBALIZATION

• The globalization of trade of goods and services

• The globalization of financial and capital markets

• The globalization of technology and communication

• The globalization of production

THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES
In a global economy, no nation is self-sufficient, which is associated with specific flows of goods,
people and information
• Import – inbound trade
• Export – outbound trade

Globalization can be considered as a system of flows:

1. Freight (trade)
2. Passengers (migration)
3. Information (telecommunications)
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES

• Freight (trade). Mainly asymmetrical flows taking place to satisfy material demands
ranging from raw materials to finished goods and all the intermediate goods in between. The
asymmetry is reflective of trade imbalances as well as the general linear organization of
supply chains (upstream to downstream). Flows are mainly supported by maritime shipping
with port infrastructures acting as the main gateways of this flow system, but airports play an
important role in the trade of high value goods. Trade networks are organized as
interconnected hub-and-spoke structures along the main poles of the global economy.
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES

• Passengers (migration). Mainly symmetrical flows of people taking place for a variety of
reasons, most of them related to tourism with air transportation being the dominant mode
supporting such flows. The global air transport system can handle about four million
passengers per day and is organized as interconnected hub-and-spoke networks converging
around major airports.
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES

• Information (telecommunications). The complex and extensive flows of information

used for communication, power exchanges (e.g. an online order) and symbolic exchanges
(e.g. education). Information flows can both take a physical (e.g. parcels) and non-physical
form, which are dominantly articulated by a network of global cities. While communication
flows are mostly symmetrical, power and symbolic exchanges are asymmetrical (from the
information provider to the consumer of information).
THE GLOBALIZATION OF TRADE OFGOODS AND
SERVICES

FLOWS OF GLOBALIZATION
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES
Trade can be a convenience, but also a necessity.

• Convenience
- when trade promotes economic efficiency by providing a wider variety of goods, often at lower
costs, notably because of specialization, economies of scale and the related comparative
advantages.
• Necessity
- when trade enables to acquire goods that would otherwise not be available in a national
economy such as energy, minerals or food.
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES

However, the benefits of trade can be subject to contention with several theoretical foundations of
international trade:
• Mercantilism
- A trade system where a nation tries to impose a positive trade balance (more exports than
imports, particularly value-wise) on other nations to favor the accumulation of wealth.
- restriction in imports – tariff barriers, quotas or non-tariff barriers.
- accumulation of foreign currency reserves, plus gold and silver reserves (bullionism).
- granting of state monopolies
- antithesis of free trade (mostly benefits one at the expense of the other)
- unequal trading system
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES
• Neomercantilism
- A more recent trade system, which like mercantilism leans on establishing a positive trade balance
to meet economic development goals
- Export-oriented strategies (establishment of an incentive and subsidy system which are additional
advantages to the factors of production).
- Response to the competitive and disruptive consequences of free trade.
- Tariff and non tariff measures
- Still, can be controversial and subject to contention.
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES
• Absolute advantages
- based on a nation (or a firm) able to produce more effectively in an economic sector while using less
resources (e.g. capital, labor) than any other potential competitors. It therefore has an absolute
advantage.
- the superior production capabilities of one entity versus another in a single area.
- looks at the efficiency of producing a single product.
- helps countries avoid the production of products that would yield little or no demand, leading to losses.
- As an example, if Japan and Italy can both produce automobiles, but Italy can produce sports cars of a
higher quality and at a faster rate with greater profit, then Italy is said to have an absolute advantage in
that particular industry. In this example, Japan may be better served to devote the limited resources and
manpower to another industry or other types of vehicles, such as electric cars, in which it may enjoy an
absolute advantage, rather than trying to compete with Italy's efficiency.
THE GLOBALIZATION OF TRADE OF GOODS AND
SERVICES

• Comparative advantages
- with the perspective that a country or business has the resources to produce a variety of goods.
- Consider opportunity cost
(The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by
choosing an available alternative in comparison).
- For example, assume that China has enough resources to produce either smartphones or computers. China
can produce 10 computers or 10 smartphones. Computers generate a higher profit. Therefore, the opportunity
cost is the difference in value lost from producing a smartphone rather than a computer. If China earns $100 for
a computer and $50 for a smartphone then the opportunity cost is $50. If China has to choose between
producing computers over smartphones it will select computers.
THE GLOBALIZATION OF FINANCIAL AND CAPITAL
MARKETS
Trade barriers or obstacles to trade take many forms:
1. Tariff – is a tax on imports
2. Export subsidies – is a payment made to domestic firms to encourage exports – can also act as barrier to
trade. (farm subsidies).
3. Quota – is a limit to the quantity of imports. Either mandatory or voluntary.
The best known voluntary quota or “voluntary restraint” was negotiated with the Japanese government in the
1981.. Japan agreed to reduce its automobile exports to the United States by 7.7% from the 1980 level of 1.82
million units to 1.68 million units.
Perhaps the most recent case is the textile quota imposed by the European Union on import textiles from China in
2005. The EU blocked the entry of Chinese produced textiles into Europe; as a result, more than 100 million
garments piled up in European ports.
THE GLOBALIZATION OF TECHNOLOGY AND
COMMUNICATION
THE GLOBALIZATION OF PRODUCTION

• Production is the process which inputs are combined and transformed into output.
• Globalization of production refers to the "sourcing of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of factors
of production like land, labor, and capital“.
• Globalization of production refers to the "sourcing of goods and services from locations
around the globe to take advantage of national differences in the cost and quality of factors
of production like land, labor, and capital“.
• Specific quantities of inputs are needed to produce any given service or good.
THE GLOBALIZATION OF PRODUCTION
• Why is this happening?
• Advances in the technological environment and regional advantages and variances in the
economic environment have allowed for transportation of larger volume goods over longer
distances.
• bigger stuff travelling farther
• technology effecting information/communications
• it is possible to "know" where to buy components parts at cheaper prices
• The approach to manufacturing - few things "made" in a factory, most stuff is assembled from
component parts that come from a variety of locations, some national, some international.
THE GLOBALIZATION OF PRODUCTION
 DISTINCTION OF GLOBALIZATION FROM
INTERNATIONALIZATION
Globalization, considered by many to be the inevitable wave of the future, is frequently confused
with internationalization, but is in fact something totally different.
• Internationalization refers to the increasing importance of international trade, international
relations, treaties, alliances, etc.
- Inter-national, of course, means between or among nations. The basic unit remains the nation,
even as relations among nations become increasingly necessary and important.
• Globalization refers to global economic integration of many formerly national economies into one
global economy, mainly by free trade and free capital mobility, but also by easy or uncontrolled
migration.
- It is the effective erasure of national boundaries for economic purposes. International trade
(governed by comparative advantage) becomes interregional trade (governed by absolute
advantage). What was many becomes one.
 THE WORLD TRADE ORGANIZATION AND GATT

The General Agreement on Tariffs and Trade (GATT) traces its origins to the 1944 Bretton
Woods Conference, which laid the foundations for the post-World War II financial system and
established two key institutions, the International Monetary Fund and the World Bank. The
conference delegates also recommended the establishment of a complementary institution to be
known as the International Trade Organization (ITO), which they envisioned as the third leg of
the system.
The United States and the United Kingdom spearheaded the initiative at the newly
formed United Nations to draft a charter for the proposed ITO. These negotiations concluded
with the signing of the Havana Charter in March of 1948. The Havana Charter never entered into
force, primarily because the U.S. Senate failed to ratify it. As a result, the ITO was stillborn.
 Meanwhile, parallel negotiations were conducted on a multilateral agreement for
reciprocal reductions in tariff barriers. These negotiations resulted in the signing of the GATT
on November 30, 1947. A sufficient number of the signatory nations, including the U.S.,
ratified the GATT for it to enter into force on January 1, 1948, under a “Protocol of
Provisional Application” while negotiations on the ITO charter continued.

The GATT survived the ITO’s demise, but it lacked a coherent institutional structure,
since the negotiators had expected the agreement to be subsumed under the ITO’s umbrella.

Despite its institutional deficiencies, the GATT managed to function as a de facto

international organization, sponsoring eight rounds of multilateral trade
negotiations. The Uruguay Round, conducted from 1987 to 1994, culminated in
the Marrakesh Agreement, which established the World Trade Organization (WTO). The WTO
incorporates the principles of the GATT and provides a more enduring institutional framework
for implementing and extending them.
• The Bretton Woods Agreement, negotiated in July 1944, established a new international
monetary system. It was developed by delegates from 44 countries at the United Nations
Monetary and Financial Conference held that month in Bretton Woods, N.H. Under the
agreement, other currencies were pegged to the value of the U.S. dollar, which, in turn, was
pegged to the price of gold. The Bretton Woods system effectively came to an end in the
early 1970s, when President Richard M. Nixon announced that the U.S. would no longer
exchange gold for U.S. currency.

• Havana Charter - Havana in 1948, the UN Conference on Trade and Employment concluded a draft
charter for the ITO, known as the Havana Charter, which would have created extensive rules
governing trade, investment, services, and business and employment practices. However, the
United States failed to ratify the agreement. Meanwhile, an agreement to phase out the use of
import quotas and to reduce tariffs on merchandise trade, negotiated by 23 countries in Geneva in
1947, came into force as the GATT on January 1, 1948.
OTHER COMPONENTS OF GATT
• Other core components include:
1. the General Agreement on Trade in Services (GATS), which attempted to supervise and liberalize trade;
2. the Agreement on Trade-Related Aspects of IntellectualProperty Rights (TRIPS), which sought to
improve protection of intellectual property across borders;
3. the Understanding on Rules and Procedures Governing the Settlement of Disputes, which established
rules for resolving conflicts between members;
4. the Trade Policy Review Mechanism, which documented national trade policies and assessed their
conformity with WTO rules;
5. and four plurilateral agreements, signed by only a subset of the WTO membership, on civil aircraft,
government procurement, dairy products, and bovine meat (though the latter two were terminated at
the end of 1997 with the creation of related WTO committees).
These agreements were signed in Marrakech, Morocco, in April 1994, and, following their ratification,
the contracting parties to the GATT treaty became charter members of the WTO. By the 2010s the WTO
had more than 160 members.
Objectives And Operation

The WTO has six key objectives:

(1) to set and enforce rules for international trade,

(2) to provide a forum for negotiating and monitoring further trade

liberalization,

(3) to resolve trade disputes,

(4) to increase the transparency of decision-making processes,

(5) to cooperate with other major international economic institutions

involved in global economic management, and

(6) to help developing countries benefit fully from the global trading
system. Although shared by the GATT, in practice these goals have
been pursued more comprehensively by the WTO.
GENERAL AGREEMENT ON TRADE AND TARIFF

• GATT was based on three principles:

1. Equal, non-discriminatory trade for all member nations;

1. The reduction of tariffs by multilateral negotiations;

1. The elimination of import quotas

Basically, GATT provided a forum for the multilateral negotiations of reduced trade barriers.
PREFERENTIAL TRADE AGREEMENTS