Global Trade and Finance Actors in a Globalizing Economy
Globalization discussions, including those by Nobel laureate Milton Friedman,
emphasize the ability to produce and sell products anywhere in the world, supported by
various global governance bodies like the IMF, OECD, and WTO prioritizing economic
globalization.
While most national governments endorse economic globalization, the COVID-19
pandemic has prompted some countries to reconsider off-shore production, favoring on-
shore or friendly shore alternatives. Social movements critique globalization for
contributing to higher unemployment, declining working standards, increased inequality,
poverty, financial crises, and environmental degradation.
Despite varying perspectives, there's a consensus that economic globalization is a
significant aspect of contemporary history, although its scale and impact may sometimes
be exaggerated.
Economic globalization involves an intricate interplay of changes and continuities,
contrary to the belief that claims about it are merely hype and myth.
The economic crises triggered by the COVID-19 pandemic and the war in Ukraine
illustrate the interconnectedness and globalization of the world's economy.
Various global governance bodies, such as the Bank for International Settlements, Group
7, and UNCTAD, actively address economic globalization as a central issue on their
agendas.
While some embrace economic globalization, others criticize its effects on
unemployment, working standards, inequality, poverty, financial stability, and the
environment, underscoring the multifaceted nature of global economic integration.
Asian Infrastructure Investment Bank (AIIB)- Established in 2016, led by China, with
93 member countries as of January 2019. It focuses on infrastructure projects and
challenges the current development regime by emphasizing fast approval processes.
Bank for International Settlements (BIS)- Founded in 1930 with headquarters in Basel,
Switzerland. It promotes cooperation among central banks and offers various services for
global financial operations.
Group of Seven (G7)-Formed in 1975 with the initial five members expanded to include
Canada and Italy. Russia was a member from 1997 to 2014. It conducts semi-formal
collaboration on global economic issues through annual summits and periodic
consultations.
Group of Twenty (G20)- Established in 1999, consisting of finance ministers and central
bank governors from 19 countries and the European Union. It serves as an informal
forum for discussing national policies, international cooperation, and reforming global
economic institutions.
General Agreement on Tariffs and Trade (GATT)- Founded in 1947 and absorbed
into the World Trade Organization (WTO) in 1995. It coordinated multiple rounds of
negotiations to reduce barriers to international trade.
International Monetary Fund (IMF)- Established in 1945 with headquarters in
Washington, D.C., consisting of 189 member states. It monitors global payments and
provides support for countries facing external imbalances through structural adjustment
programs.
International Organization of Securities Commissions (IOSCO)- Founded in 1983 to
promote regulation and surveillance of global securities markets, fostering collaboration
among securities regulators worldwide.
New Development Bank BRICS (NDB BRICS)- Operated by BRICS countries (Brazil,
Russia, India, China, and South Africa) as an alternative to institutions like the World
Bank and IMF, focusing on development projects.
Organization for Economic Co-operation and Development (OECD)- Established in
1962 in Paris, comprising 35 advanced industrial economies. It facilitates consultations
on various policy issues, including economic performance assessments and policy
recommendations.
United Nations Conference on Trade and Development (UNCTAD)- Founded in
1964, headquartered in Geneva, monitoring the effects of global trade and investment on
economic development, especially in developing countries.
Crossing of Borders-This perspective on economic globalization focuses on the
movement of goods, services, and capital across national boundaries. It highlights the
physical transfer of economic resources between countries, emphasizing the
interconnectedness facilitated by international trade and investment.
Opening of Borders- In this view, economic globalization is seen as the liberalization of
trade and financial regulations, leading to increased access to foreign markets and
investment opportunities. It emphasizes the removal of barriers such as tariffs, quotas,
and capital controls, promoting greater integration and interaction between economies.
Transcendence of Borders- This conception of economic globalization goes beyond
physical and regulatory aspects to emphasize the blurring or erasure of traditional
national boundaries. It suggests a shift towards a more borderless world where economic
activities are less confined by geopolitical borders, facilitated by advancements in
technology, communication, and global governance structures.
Cross-Border Transactions
Skeptics argue that the concept of economic globalization, framed solely in terms of
increased cross-border movements, lacks novelty, as commerce between different
political units has existed for centuries. Examples include trading routes between Arabia
and China via South and Southeast Asia over a millennium ago.
Cross-border economic activity, including trade, investment, and financial transactions,
flourished in premodern times. For instance, banks from Italian city-states had offices
along trade routes as early as the twelfth century, and international markets for loans and
securities thrived during the gold-sterling standard era (1870–1914).
Relative to population and output, levels of permanent migration and cross-border
investment in production facilities in the late nineteenth century were considerable,
comparable to or even exceeding those of the late twentieth century.
Skeptics note that, measured proportionally, cross-border trade and finance in the late
nineteenth century may have been comparable to or greater than those of recent decades.
For instance, international trade grew at a significant rate between 1870 and 1913,
reaching a substantial share of world output.
Skeptics view contemporary economic globalization as potentially temporary, akin to the
growth of international interdependence in the late nineteenth century, which was
followed by a wave of protectionism after World War I. They suggest that governments
retain the ability to restrict cross-border flows based on national interest.
Contrary to predictions of the demise of the state, skeptics argue that nation-states
continue to play a pivotal role in the global economy. They emphasize that most so-called
global companies maintain strong national identities and depend heavily on states for
their success.
Skeptics highlight the potential for governments to reverse the trend of economic
globalization through protectionist measures, including tightening restrictions on
international trade, travel, foreign exchange, and capital movements, based on national
interests and priorities.
Despite expectations of diminishing national loyalties and a decrease in conflicts,
skeptics argue that contemporary economic globalization has not significantly altered
these dynamics. They point out that war and national interests remain prominent factors
in global affairs.
Skeptics emphasize the continued importance of state control over economic activities,
suggesting that states retain significant influence over cross-border flows and can
intervene to protect domestic interests when necessary.
Skeptics highlight the persistence of corporate national identity, asserting that most
global companies continue to conduct the majority of their business within their country
of origin and maintain strong ties to their home state.
Open-Border Transactions
Enthusiasts view contemporary globalization as the progressive removal of official
restrictions on transfers of resources between countries, leading to open borders and a
global society.
Globalists argue that globalization extends beyond internationalization, with global
companies, trade, money, and finance replacing their international counterparts.
Open borders create markets larger than regional arrangements like the European Union
and USMCA, fostering global economic growth and integration.
Initiatives like the Trans-Pacific Partnership (TPP) and agreements between the European
Union, Japan, and Canada reflect efforts to promote free trade and globalization.
Globalists view protectionism from 1910 to 1950 as a temporary deviation from the
longer historical trend toward a single integrated world economy.
Advocates believe that opening borders promotes prosperity, liberty, democracy, and
peace, contrasting it with the economic depressions and conflicts of the protectionist era.
Successive agreements under the GATT and WTO have significantly reduced customs
duties and quotas, facilitating cross-border trade and investment flows.
Regional frameworks like the European Union and USMCA have further removed
official restrictions on trade between member countries, contributing to global economic
expansion
Encouraged by liberalization efforts, international trade expanded significantly between
1950 and 1994, with average tariffs on manufactures falling and total trade multiplying
fourteen-fold in real terms.
The open-border perspective aligns with neoliberal ideals, emphasizing the benefits of
free markets, deregulation, and global economic integration.
The gold-dollar standard, fully operational through the IMF in 1959, allowed major
currencies, especially the US dollar, to circulate worldwide, resembling the late
nineteenth-century gold-sterling standard.
Following the US government's termination of dollar-gold convertibility in 1971, a
regime of floating exchange rates emerged, accompanied by the reduction or elimination
of restrictions on the import and export of national currencies.
The liberalization of money movements led to a significant increase in daily transactions
on the world's wholesale foreign exchange markets, rising from $15 billion in 1973 to
$1,900 billion in 2004.
Recent decades have witnessed the widespread opening of borders to both direct
investments, such as research facilities and factories, and portfolio investments, including
loans, bonds, and stocks.
The global economic downturn in 2008, initiated by the sale of securities tied to unwise
mortgages in the United States, highlighted the interconnectedness of investment flows
on a global scale.
The number of international, multinational, transnational, or global corporations grew
substantially from 3,500 in 1960 to nearly eighty thousand in 2006, indicating the
increasing globalization of business operations.
Global foreign direct investment (FDI) inflows reached $1.3 trillion in 2018, reflecting
the growing integration of economies and the attractiveness of jurisdictions for externally
based businesses.
Substantial liberalization since the 1970s has allowed for cross-border portfolio
investments, contributing to economic recessions and the ongoing global crisis, with
financial institutions converging on global cities.
Legal obstructions to economic transactions between countries have greatly diminished
worldwide, with significant reductions in trade restrictions and the removal of ownership
and trading restrictions on stocks and bonds
Despite the opening of borders, significant official restrictions remain, including trade
barriers, capital controls in many countries, and tight immigration controls, suggesting
that international borders can still be opened or closed at states' discretion.
THEORY IN PRACTICE Globalization and “America First” Nationalism
Protectionism and economic nationalism are increasing globally, posing challenges to
global trade and economic cooperation.
President Trump's consideration of trade quotas or tariffs to protect US aluminum
producers highlights the impact of protectionist policies. The US aluminum industry has
significantly declined, with only a few smelting factories remaining.
While foreign sources like China are often blamed for the decline of the US aluminum
sector, factors such as the cost of electricity play a significant role. ALCOA and Century
Aluminum have shifted operations to countries like Iceland due to cheaper hydropower.
Countries like Iceland, Norway, and Canada have surpassed the US in aluminum
production due to lower electricity costs. This highlights the global nature of competition
and industry mobility in the era of globalization.
While the US loses jobs in the aluminum industry, shareholders benefit, consumers enjoy
lower prices, and countries like Iceland gain jobs and tax revenue, diversifying their
economies beyond fishing.
Economist Richard Baldwin distinguishes between old and new globalization, with the
latter characterized by the transfer of production activities facilitated by information and
communication technology.
Developing states like China, South Korea, India, Poland, Indonesia, and Thailand have
benefited from the North-to-South flow of expertise, developing extensive manufacturing
sectors.
The new phase of globalization is marked by sudden and less controllable impacts,
making it challenging for leaders to predict industries' movements between wealthy
Northern states and low-wage Southern states.
Rather than increasing smelting operations, Iceland aims to sell its surplus electricity,
showcasing the multifaceted nature of globalization and the need for adaptive strategies.
Leaders must learn to manage the complexities of globalization, balancing the benefits of
global trade with the need to address domestic economic challenges and societal impacts.
Transborder Transactions
Economic globalization debates primarily involve skeptics and globalists, yet a third
perspective offers a unique interpretation.
Globalization is seen as a transformation of geography, where social conditions become
less tied to territorial spaces.
Patterns of production, exchange, and consumption are increasingly delinked from
territorial distances and borders, extending across dispersed locations worldwide.
The rise of a transborder economy is evidenced by increased transactions between
countries, transcending traditional territorial frameworks.
Contemporary economic statistics may not accurately reflect the qualitative shift in
global movements and activities, as they often ignore vital non-modern activities.
The emphasis is on how commerce shapes transborder production processes and global
marketing networks, rather than solely on the volume of trade.
The immediacy of fund transfers and the emergence of multi-country stock and bond
issues highlight the evolving nature of global financial systems.
Both skeptics and enthusiasts may overlook the crucial point of historical change when
considering globalization from this perspective.
Globalization involves the transcendence of territorial geography, facilitated by
advancements in transportation, communication, and global consciousness.
The evolving nature of global economic activity challenges conventional interpretations
of globalization, necessitating a nuanced understanding of its multifaceted impacts.
Global Trade
The majority of global trade operates within the framework of the World Trade
Organization (WTO), which serves as a multilateral discussion forum rather than a
comprehensive global trade system.
Member states of the WTO commit to lowering tariffs, eliminating non-tariff barriers to
trade, and adhering to principles such as most-favored-nation status, aimed at preventing
discrimination against trading partners.
The WTO promotes the idea that multilateral free trade agreements are superior to
bilateral deals, fostering greater economic cooperation among member states.
Disputes within the world trading system often arise due to domestic political motives, as
seen in movements like the US "America First" and Brexit campaigns, which aimed to
protect domestic jobs.
The WTO employs a dispute-resolution panel to address disagreements, keeping the
process at the multilateral level to prevent unilateral actions that could undermine global
trade goals.
While disputes are brought before the Dispute Settlement Body, parties often settle
before reaching a full panel, preferring to utilize reconciliation and mediation services to
avoid retaliation risks.
Members of the WTO often opt for reconciliation and mediation services provided by the
secretary-general to resolve disputes, mitigating the risk of trade retaliation and fostering
amicable solutions.
Transborder Production
Transborder production involves dispersing a single production process across various
locations within and between countries, connected through global coordination.
Unlike territorially centered production where all stages occur within a local or national
unit, transborder production disperses stages across different countries to exploit cost
differentials and create economies of scale.
Companies engaged in transborder production source materials, components, machinery,
finance, and services globally, with territorial distance and borders playing a secondary
role in site determination.
Transborder factories emerged notably in the 1960s and proliferated since the 1970s,
particularly in industries such as textiles, automobiles, electronics, and construction
equipment.
A significant portion of international trade involves intrafirm transfers within transborder
companies, where goods move between countries but primarily within the same
company's global network.
Many transborder production activities occur within special economic zones, where
governments offer exemptions from import/export duties, tax reductions, subsidies, and
waivers of labor and environmental regulations to attract investment.
These zones, established primarily after 1970, are found across Asia, the Caribbean, and
maquiladora areas in Mexico, often relying heavily on female labor and serving as hubs
for transborder production activities.
Transborder Products
Both transborder and domestically produced goods have access to a global market in the
contemporary economy, with a significant portion of international trade involving
distribution and sale of global goods under transworld brand names.
Consumers worldwide purchase the same products simultaneously, with the location of
the consumer being secondary to factors like design, packaging, and advertising, which
determine the market more than territorial boundaries.
Supraterritorial markets, although less recognized, have a longer history than commonly
appreciated, exemplified by household brands like Campbell Soup, Heinz, and Coca-Cola
expanding globally as early as the late 19th and early 20th centuries.
Unlike earlier global markets with limited goods and reach, contemporary global goods
span various sectors including food (e.g., Dunkin’ Donuts), beverages (e.g., Red Bull),
publications (e.g., The Hunger Games trilogy), and travel services (e.g., Airbnb).
Global products are ubiquitous, with Dunkin’ Donuts operating over 3,100 stores in 30
countries, Red Bull available in more than 169 countries, The Hunger Games trilogy
published in 51 languages and sold in 56 markets, and Airbnb offering listings in over
34,000 cities across 190 countries.
These global products offer a sense of familiarity and consistency worldwide, providing
consumers with access to familiar brands and experiences regardless of their location on
Earth.
The widespread availability and accessibility of global goods exemplify the influence of
globalization on consumer markets, facilitating the dissemination of products and brands
across borders.
