Lesson 2 Globalization: Characteristics and Trends ESSENTIAL QUESTION What are the challenges associated with globalization? Reading HELPDESK Academic Vocabulary strategy plan or method context circumstances surrounding a situation or event Content Vocabulary globalization movement toward a more integrated and interdependent world economy multinationals corporations producing and selling without regard to national boundaries and whose business activities are located in several different countries outsourcing hiring outside firms to perform non-core operations to lower operating costs General Agreement on Tariffs and Trade (GATT) an international agreement signed in 1947 between 23 countries to extend tariff concessions and reduce import quotas World Trade Organization (WTO) international agency that administers trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries free-trade area group of countries that have agreed to reduce or remove trade barriers among themselves, but lack a common tariff barrier for nonmembers customs union group of countries that have agreed to reduce or remove trade barriers and have uniform tariffs for nonmembers European Union (EU) established in 1993 by the Maastricht Treaty, its 28 member countries make it the largest single unified market in the world in terms of population and output European Coal and Steel Community (ECSC) group of six European countries formed in 1951 to coordinate iron and steel production to ensure peace among member countries; eventually evolved into the EU euro single currency of the European Union ASEAN group of ten Southeast Asian nations working to promote regional cooperation, economic growth, and trade Common Market for Eastern and Southern Africa (COMESA) a trading organization consisting of nineteen nations that pools its resources to produce peace and security cartel group of sellers or producers acting together to raise prices by restricting availability of a product Organization of Petroleum Exporting Countries (OPEC) organization formed to oversee a common policy for the sale of petroleum division of labor division of work into a number of separate tasks to be performed by different workers; same as specialization 1
TAKING NOTES: Key Ideas and Details Use a graphic organizer like the one below to identify key global institutions that promote trade and to identify one function of each. Global Institutions Characteristics of Globalization Guiding Question How would you define globalization? There was a time when most markets were local. But markets stretched to nearby communities as transportation and communication improved and populations grew. Later, local markets expanded into larger regions, then the nation, and today the world. This process over time causes many economists to see globalization as a natural, expected process. But globalization involves more than markets it also reaches production, institutions, and even culture. Global Products and Markets Today you can find the same goods all over the globe, such as products from McDonald s, KFC, Pizza Hut, Starbucks, or Pepsi. This would have been surprising just a few decades ago, but today being able to buy the same good all over the world is normal. Multinationals produce and sell many of the products we use. These firms both produce and sell their products across the world. Some of these giant corporations are well known to most people, including British Petroleum (United Kingdom), Ford Motor Company (United States), and Shell Oil Company (United Kingdom and the Netherlands). Other corporations are not as well known but make products that millions of Americans use every day. These include News Corporation (Australia), Kyocera (Japan), and Vodaphone (United Kingdom). Stores sell a wide variety of products from other countries because of globalization. Switzerland s Nestlé provides us with chocolate bars, coffee, and Stouffers sells frozen foods. A Venezuelan company owns the Citgo gas station you might use. A Japanese firm owns 7-Eleven stores. The products these companies offer are the same no matter where the company sells them. This similarity makes selling easy in a global market. Global Production Globalization means more than having standardized products all over the world. It affects production as well. In some cases, multinationals move their production facilities to be nearer to customers. For example, firms such as Toyota, Nissan, and Honda have opened manufacturing operations in the 2
NAME DATE CLASS United States. Other firms such as IBM, Boeing, and Intel have moved their production facilities outside the U.S. for less expensive sources of labor and raw materials. Most global manufacturers are very advanced. For example, Dell uses the Internet to track production and shipping in its plants around the world. Dell is able to keep a small, three-day inventory in its assembly plants by closely watching its operations. If conditions in one place suddenly change, Dell can speed up or slow down shipments of parts to keep production flowing smoothly. One part of global production that many people debate is outsourcing. Outsourcing is when a firm hires outside companies to do part of the firm s operations to lower costs. Many Americans do not agree about outsourcing because they fear losing their jobs to overseas workers. This is a concern for many workers. But over time, the lower costs of production and the lower prices for consumers are bigger benefits than the lost jobs. This is not very comforting to those who lose their jobs. Yet these workers have probably benefited from globalization. They have probably bought low-priced clothes made in Indonesia, TV sets from Korea, or other products made abroad. Exploring the Essential Question Despite the benefits of global production that shifts jobs to places where greater efficiencies are available, workers who lose their jobs suffer, especially those who lack the job skills or education to move into other jobs. Does the government have a role to play in helping these workers? What can or should the government do? Global Institutions Another part of globalization is the growth of international organizations that promote global trade. Descriptions of some of the most important ones are below. GATT The General Agreement on Tariffs and Trade (GATT) is an international agreement that twenty-three countries signed in 1947. The countries agreed to give each other breaks on tariffs and remove import limits. If a country does not agree with a tariff or other trade issue, it can take it to the World Trade Organization to decide. WTO GATT was so successful that the World Trade Organization (WTO) formed. Today more than 150 countries belong to the WTO. They use it whenever they disagree with each other. For example, in 2013 Panama said that Colombia had an unfair tariff that affected importing textiles, clothing, and shoes made in Panama. IMF The International Monetary Fund (IMF) gives advice and financial help to nations so that their currencies can compete in open markets. Without the IMF, many countries would not be able to take part in international trade. This is because other nations would not accept their money. The IMF also gives zero-interest loans to strengthen macroeconomic policies and projects in low-income countries. For example, the IMF gave Malawi a $156 million loan to help its economy after the recent global recession. It also gave $4 billion to Côte d Ivoire to help it lower its external debt. 3
World Bank The World Bank is another international group that helps developing countries join global markets. This supports these countries economic development strategy. The World Bank provides technical help, financial support, and grants for infrastructure to help even the poorest of nations take part in globalization. For example, the World Bank is helping rural farmers in Armenia improve their irrigation systems. United Nations Finally, the United Nations helps to keep peace through international cooperation and economic-development projects. These projects affect farming, entrepreneurship, and young women s employment opportunities. Reading Progress Check Analyzing How do multinational firms contribute to globalization? Regional Economic Cooperation Guiding Question How do agreements for regional cooperation help member nations? An important step on the way to globalization is creating regional trading blocs to promote trade between nations. Most trading blocs begin with a small number of countries, and then they add members to become larger. In the end, they usually join other countries, which leads to even more globalization. One important type of economic cooperation is the free-trade area. This exists when two or more countries agree to lower or remove trade barriers and tariffs among themselves. The free-trade area is only for its own members. Another cooperative arrangement is the customs union. The customs union is when two or more countries agree to lower or remove tariffs and trade limits. But they also accept uniform tariffs for nonmember countries. The customs union reaches more countries than a free-trade area, so it represents a higher level of integration. The European Union The most successful example of regional cooperation in the world today is the European Union (EU). The EU started out as a free-trade area and turned into a customs union with the member nations shown in Figure 18.2. The EU grew out of the European Coal and Steel Community (ECSC), which was made up of Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. They organized in 1951 to manage iron and steel production so that it would be difficult for any of the nations to ever again go to war with one another. The ECSC was very successful. Over the years, the cooperation evolved into the EU. In January 1993, the EU became the largest single unified market in the world in terms of population and output. The EU and the United States now have about the same size GDP. The EU is a single market because there are no internal barriers to the flow of workers, financial capital, or goods 4
and services. Citizens of EU member nations have common passports and can travel anywhere in the EU to work, shop, save, and invest. A major step in European integration happened in 2002. The EU introduced the euro, a single EU currency. About half of the member nations have replaced their national currencies with the euro. The European Union has not yet reached complete economic integration because many differences remain. But the EU is still one of the largest unified markets in the world. ASEAN The success of the EU has encouraged other countries to try regional cooperation. In 1967, five nations formed the Association for Southeast Asian Nations, or ASEAN. These were Indonesia, Malaysia, Singapore, the Philippines, and Thailand. ASEAN today is a 10-nation group that supports regional peace and stability, faster economic growth, and greater free trade policies in order to become a free-trade area. You can see what ASEAN looks like today in Figure 18.3. The region seems to be well on its way to removing tariffs and other non-tariff barriers. But the financial crisis after the Great Recession in the United States lowered the demand for ASEAN s exports. So ASEAN is working to build a stronger and more unified internal market that will not depend as much on exports. NAFTA The North American Free Trade Agreement, or NAFTA, was another successful step on the way to globalization. NAFTA became law in 1993. It completely removed tariff barriers and quotas among Canada, the United States, and Mexico. NAFTA s goals were complete by 2008 and it has greatly increased trade among the three countries. COMESA In 1994, the Common Market for Eastern and Southern Africa (COMESA) formed. COMESA has nineteen member countries, as shown in Figure 18.4. But progress toward a common market has been slow because of several problems. One problem was the way the countries were spread out across Africa. The countries ranged from Swaziland in the south to Libya in the north. Also, several countries did not have the infrastructure for good communication and transportation. Finally, regional wars and the political conflicts in Libya and Egypt during the Arab spring made economic cooperation more complicated. Still, cooperation has begun, and the countries hope to benefit from it in the future. OPEC In 1960, several oil-producing nations formed a cartel. A cartel is a group of producers or sellers who agree to limit the production or sale of a product so they can control prices. You can see the members of Organization of Petroleum Exporting Countries (OPEC) in Figure 18.5. OPEC s members tried to create the same thing as a monopoly and push up world oil prices. They succeeded and the higher oil prices have transferred trillions of dollars from industrialized nations to OPEC member countries. Even with all this financial capital, most OPEC nations have grown slowly. In Iran, revolution interrupted the development of the national economy. In Nigeria, corruption drained most of the oil profits that could have been used for economic development. High oil prices returned in 2006 and 2008, but the Great Recession of 2008 2009 beat them down again. As a result, OPEC mostly failed to further develop the economies in its member countries. 5
Reading Progress Check Describing How do agreements for regional cooperation help member nations? Globalization Trends Guiding Question Why is economic integration important in a global economy? As globalization continues, and trade blocs like free-trade areas and customs unions may join together to create even larger global markets. This will have added benefits because economic cooperation usually leads to increased political cooperation. In this way, globalization will probably improve economic growth and political stability among all nations. Even with continued globalization, however, two trends stand out. The first is the growing economic interdependence among nations. The second is growing regional economic integration around the world. Growing Interdependence Producers become more specialized in their activities as markets develop. Specialization and the division of labor lead to higher levels of productivity. If producers who do a specialized task have a comparative advantage, they will be able to compete more effectively in the market. Comparative advantage is the ability to do something at a relatively lower opportunity cost than someone else. In the context of the family, this usually means that the strongest person does the tasks that require the most strength. In a global context, the countries that are the most effective at using capital and technology are the ones that manufacture products such as automobiles and construction equipment. They can exchange these for the raw materials of other nations. The result is an incredible amount of interdependence. This means that we depend on others, and others depend on us, for almost everything we do. Globally, interdependence lets a country such as Japan become an advanced industrial nation even though it has almost no domestic energy resources. Other countries with little manufacturing capacity, such as Saudi Arabia, can exchange their energy resources for many different manufactured goods. The weakness of interdependence is that a problem anywhere in the global system could affect everyone. As globalization continues, this is something everyone is concerned about. Will Globalization Continue? Progress toward globalization has not always been smooth, despite its growth and support. People can feel threatened by changes to their regular ways of doing business. When people fear losing their jobs and even their way of life, their fears can explode into conflict. Small problems can happen, such as when McDonald s or KFC opens a store in a historic European location and people feel that the heritage of a location is being compromised. It also happens when Wal-Mart opens a new store in England, China, or any other country where it might force local mom and pop businesses to close. 6
NAME DATE CLASS Globalization concerns apply to services as well. France has rules to protect domestic filmmakers by limiting the number of American movies that theaters can show. Canada requires its radio stations to keep a certain amount of airtime for Canadian musical artists. Politics can also help or hinder globalization. When nations get along well with one another, they are more likely to cooperate by starting free-trade areas or customs unions. If nations do not get along well, or if there is conflict, then the opposite can happen. For example, if the United States and China disagree about the future of Taiwan, it could interrupt China s globalization. If this happens, trade will likely decrease between the two nations, which would greatly slow down globalization. Finally, some radical political organizations are against the capitalism that pushes globalization. Before World War I began in 1914, Russian revolutionaries called Bolsheviks fought against capitalism. Now fundamentalist extremists such as al-qaeda are against globalization. So while globalization can lead to great economic improvements, not everyone may value these improvements in the same way. If people feel a threat to their culture, politics, or religion, it can slow or stop the process of globalization. Reading Progress Check Describing What characteristics show that the European Union is successful at regional integration? 7