Globalisation

Characteristics of Globalisation

In economics, __globalisation __means the increased interdependence between the economies of individual countries and different regions of the world. This means that economic events in one part of the world are likely to have effects everywhere else. For instance, the financial crisis in 2007-8 soon spread from the USA to Europe and many other regions. There are four principal characteristics of globalisation:

1. Free trade in goods and services – In recent decades there has been a fall in trade barriers, especially __tariffs __(taxes on imports). This makes it much easier for goods to be bought and sold across national frontiers.
2. Free movement of labour – It is generally easier for people to choose to live and work in other countries than in the past. This is particularly true of the European Union, where the freedom to live, work or study in another EU country is a fundamental right.
3. Free movement of capital – This refers to the freedom of businesses in one country to invest in another country. It includes direct investment (buying a foreign company or setting up a new one abroad) and indirect investment (buying shares in foreign companies or lending abroad)
4. Free transfer of technology and knowledge – Companies can license the use of their technology to companies abroad or employ their own technological expertise in factories they own abroad. Gradually this leads to the more widespread knowledge and use of technology around the globe. For instance, China is now a major player in telecoms and digital technologies, with its own successful companies; it is no longer just a place for companies like Apple to assemble their products.

Causes of Globalisation

International trade and movement of people across the world has been going on for thousands of years, but the trend towards a more integrated world economy has greatly accelerated in recent decades. The main causes of globalisation are:

Falling trade barriers - Since the end of World War II in 1945, bodies such as the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the World Bank have sought to reduce tariffs and other forms of barriers to free trade (see notes on 4.1.5 and 4.1.6). These organisations have also worked to help reduce barriers to the free movement of capital, making it easier for firms to invest abroad.

Emerging market economies – Countries like China, Brazil and India have emerged as major economies in the last 30 years and are now important producer and consumer nations. China is now the second biggest economy in the world, and will soon overtake the USA, currently in first place. These countries are important markets for American, European and Japanese companies, and also as suppliers of manuactured goods and services. China is also now a major souce of investment funds for the USA and Europe. (For instance, Chinese banks are providing the funding for the construction of several new nuclear power stations in Britain).

Technological change – The huge progress in digital and communication technologies makes it far easier (and cheaper) to trade in financial services, and to share knowledge and information. Call centres can be located thousands of miles away. It is also easier for firms to outsource research and development abroad when information can be accessed via secure computer networks.

Improved transport – Investment in road, rail, air and sea transport has revolutionised the movement of goods and people around the world. Them most important single development is probably containerisation. This is the movement of goods in steel containers of a standardised size, which can be easily transferred from lorries to trains or ships, greatly reducing the storage and handling costs of moving goods.

Multinational (or transnational companies) – A multinational company is one that operates in more than one country. Many now have production facilities in different parts of the world. Some are also owned by shareholders in more than one country. Car manufacturers like VW sell all over the world, but also have factories in Europe, N and S America and China. Apple is based in California, where it does most of the design and marketing of its products, but manufacturing is outsourced to a partne firm in China. The growth of multinationals has resulted in very complex supply chains, so that very few products are made completely in just one country.

The Effect of Globalisation

Consumers

Changing Prices – The prices of many goods has fallen as production has shifted to low cost countries. The manufacture of phones, computers and cameras for instance has shifted to countries like China, where wages are much lower than in Europe or America. Similarly, the production of clothes is now mainly in South east and South Asia. This has resulted in much lower prices of these goods.

Some goods, however have risen in price, due to the increased demand resulting from rising incomes in emerging market countries. Food is a good example. With higher incomes, people in China now consume much more meat, driving up prices all over the world.

More choice – Increased international trade means consumers have a wider choice of goods and services from suppliers all over the world. The range of foods in supermarkets is a good example; we can now get almost any kind of food at any time of the year and no longer have to eat what is seasonally available locally.

Businesses

Lower costs – Firms can now source materials and components from all over the world, finding the cheapest sppliers. Multinationals are also able to relocate production to low wage countries. Alternatively they may outsource the manufacturing or other activities such as customer service calls to countries such as India.

Increased interdependence – Globalisation has produced increasingly complex supply chains. This carries risks as well as benefits; a strike, natural disaster or political instability in a country whose firms supply businesses overseas can cause serious disruption for its customers. Equally, firms that depend on overseas markets for their customers may be adversely affected by events abroad over which they have no control. For instance the german car industry was badly affected by the financial crisis in the USA and Europe in 2007/8.

Tax avoidance – Multinationals are very good at exploiting loopholes to minimise their tax liabilities. Transfer pricing is one example. Suppose a firm produces components in country A which it then ships to country B, where they are assembled into a inished product.

Suppose that in country A profits are taxed at 30%, but only at 15% in country B. The firm can minimise its overall tax bill by ‘selling’ the components from its plant in country A to the plant in country B at a very low price. This means the plant in country B makes little profit (where tax is high), but a big profit in country B (where tax is low).

A well known online retailer (beginning with ‘A’) routes all its sales in the U.K. to an office in Ireland, where profits are taxed at a lower rate. The U.K government loses a lot of tax revenue as a result.

Workers

Employment – Some manufacturing industries, such as textiles and electronics have largely moved out of Europe and north America, and are now mainly located in Asia. This has produced a problem of structural unemployment in the countries losing these jobs, but has created millions of jobs in developing countries.

__Wages __– Low skilled workers in rich countries are more exposed to competition from low paid workers in developing countries. This is particularly true in manufacturing industries, where firms can shift production or outsource it overseas. This will tend to drive down wages of low skilled workers in rich countries, but raise wages in developing countries for workers who leave very low paid work in agriculture and migrate to the cities to work in factories. Highly skilled professionals and workers in service industries are less exposed to competion from workers abroad. For instance, very few people travel abroad for a haircut.

Migration __– There has been a big increase in the numbers of __economic migrants, as barriers to movement have come down. Workers from developing countries may be able to earn much more in the rich world. The impact on workers in the host country is complicated. Where migrants compete directly with indigenous workers, it is likely to drive down wages. But in many cases they don’t. For instance, very few British people want to pick fruit for a living; this is largely done by migrants. Also, some migrants help to fill vacancies where there are skill shortages, and so raise overall productivity and wages. Others may start businesses and create employment.

The environment

Increased world trade – The greater movement of goods by sea and air has contributed to the increase in greenhouse gases and global warming

Relocation of polluting industries – Multinationals have tended to relocate or outsource their polluting activities to developing countries where there is less environmental regulation.

Governments

Tax revenues – Multinational companies are able to shift production from high tax to low tax countries and can also avoid taxes through transfer pricing. The shortfall in tax revenues means either less public spending or higher taxes from households and domestic companies that can’t avoid taxes in the same way. But where foreign investment and trade contribute to economic growth, a government will benefit from higher tax revenues.

__Corruption __– This is particularly (but not uniquely) a problem in developing countries, where officials are prone to accepting bribes in return for awarding contracts or granting planning permission to multinationals. This can result in bad decisions which harm the economy. For instance a contract to build a power station may be awarded to the firm paying the biggest bribe rather than the one that can build the most reliable and efficient power station.

Individual Countries

Some countries, such as China have been transformed through globalisation. China is now the world’s biggest manufacturer and living standards have risen dramatically. Smaller and less powerful countries, particularly in Africa have not benefited to the same extent. They have attracted much less inward investment in manufacturing and instead continue to rely on minerals and agricultural products for their livelihoods. The ownership of these resources is increasingly in the hands of foreign owners. These primary products are then processed into high value added goods abroad.

Identify and briefly explain three effects of globalisation on each of the following: Consumers, Businesses, Workers

Your answer should include: prices / costs / choice / employment / wages / multinationals / interdependence / tax avoidance / profits