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Chapter 1: Introduction to Global Trade and Globalization.

# We are moving toward a world in which barriers to cross-border trade and investment
are declining; perceived distance is shrinking due to advances in transportation and
telecommunications technology; material culture is starting to look similar the world over;
and national economies are merging into an interdependent, integrated global economic
system. The process by which this transformation is occurring is commonly referred to as
Globalization

➢ What Is Globalization?
Globalization refers to the shift toward a more integrated and interdependent world economy.
Globalization has several facets, including the globalization of markets and the globalization of
production.
Video1, Titled “Globalization explained”
Video2, Titled “Mike O'Sullivan: The end of globalization (and the beginning of something
new) | TED”

There are two components of globalization-

❖ Globalization of Markets
❖ Globalization of Productions

Globalization of Markets
The globalization of markets refers to the merging of historically distinct and separate
national markets into one huge global marketplace.
Falling barriers to cross-border trade and investment have made it easier to sell internationally. It
has been argued for some time that the tastes and preferences of consumers in different nations
are beginning to converge on some global norm, thereby helping create a global market.
Some examples of trend would be: Coca-cola, IKEA furniture, Starbucks Coffee, Sony
Playstation, McDonalds et cetera.
By offering the same basic product worldwide, they help create a global market.
The necessity to be multinational giant in order to import/export in a global market is none. More
generally, exports from small and medium-sized companies accounted for 33 percent of the
value of U.S. exports of manufactured goods.
Significant differences still exist among national markets along many relevant dimensions,
including consumer tastes and preferences, distribution channels, culturally embedded value
systems, business systems, and legal regulations. Uber, for example, the fast-growing ride-for-
hire service, is finding that it needs to refine its entry strategy in many foreign cities in order to
take differences in the regulatory regime into account.
The most global of markets are not typically markets for consumer products where
national differences in tastes and preferences can still be important enough to act as
a brake on globalization but markets for industrial goods and materials that serve
universal needs the world over.
In many global markets, the same firms frequently confront each other as competitors
in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries
between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu in earthmoving
equipment; General Electric and Rolls-Royce in aero engines; Sony, Nintendo, and Microsoft in
video-game consoles; and Samsung and Apple in smartphones.

Globalization of Productions
The 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 (such as labor, energy, land, and capital).
By doing this, companies hope to lower their overall cost structure or improve the quality or
functionality of their product offering, thereby allowing them to compete more effectively.
For example, Boeing has made extensive use of outsourcing to foreign suppliers, with 30% of
the 777 being built by foreign companies and 65% of the 787 being built by Japanese companies.
This is done to ensure a better final product and increase the chances of winning orders from
airlines based in that country.
Also, companies are increasingly outsourcing service activities to low-cost producers in other
nations, such as radiology work in India and software companies using Indian engineers to
perform test functions on software designed in the United States. Other companies are
outsourcing customer service functions, such as customer call centers, to developing nations
where labor is cheaper. This could reduce health care costs by more than $100 billion.

And-
❖ Increasingly, according to Reich, the outsourcing of productive activities to different
suppliers results in the creation of products that are global in nature, that is, "global
products.”
❖ As we will see in later chapters, substantial impediments still make it difficult for firms to
achieve the optimal dispersion of their productive activities to locations around the globe.

➢ The Emergence of Global Institutes

Globalization has created the need for institutions to help manage, regulate and police the global
marketplace.

The World Trade Organization (WTO) is an international institution that has been created to help
manage, regulate, and police the global marketplace and to promote the establishment of
multinational treaties. It is responsible for policing the world trading system and making sure
nation-states adhere to the rules laid down in trade treaties signed by WTO member states. As of
2017, 164 nations accounted for 98 percent of world trade were WTO members, giving the
organization enormous scope and influence. The WTO has been the instrument of its member
states, which have sought to create a more open global business system unencumbered by
barriers to trade and investment between countries. Without an institution such as the WTO,
globalization of markets and production is unlikely to have proceeded as far as it has.

The United Nations (UN) and the International Monetary Fund (IMF) are two major global
institutions that have been established in 1944 by 44 nations to maintain order in the
international monetary system. The IMF is often seen as the lender of last resort to nation-states
whose economies are in turmoil and have lost value against those of other nations. The World
Bank is less controversial and has focused on making low-interest loans to cash-strapped
governments in poor nations. Recently, the IMF has lent money to the governments of troubled
nations and taken a proactive role in helping them cope with some of the effects of the 2008-
2009 global financial crisis. However, some critics argue that the IMF's policy recommendations
are often inappropriate and that national governments must adopt specific economic policies in
order to return their troubled economies to stability and growth. The UN was established in 1945
by 51 countries committed to preserving peace through international cooperation and collective
security, and today almost every nation in the world belongs to the IMF.

➢ Drivers of Globalization
Two macro factors seem to underlie the trend toward greater globalization -
❖ Declining Trade and Investment Barrier
❖ Technological change

Declining Trade and Investment Barrier

During the 1920s and 1930s, many nation-states erected barriers to international trade and
foreign direct investment. This led to "beggar thy neighbor" retaliatory trade policies, which
depressed world demand and contributed to the Great Depression. After World War II, the
advanced industrial nations of the West committed to reducing barriers to the free flow of goods,
services, and capital. This goal was enshrined in the General Agreement on Tariffs and Trade
(GATT). Table 1.1 summarizes the impact of GATT agreements on average tariff rates for
manufactured goods, which have fallen significantly since 1950 and now stand at 1.6 percent.
Comparable tariff rates in 2017 for China and India were 3.4 and 7.1 percent, respectively.

Knowledge Society and Trade Agreements

Figure 1.1 reports on the value of world trade, world production, and active regional trade
agreements from 1960 to 2020. It shows that by 2020, world trade will be 167 times larger than it
was in 1960, while the world economy will be 65 times larger. This is due to the increased
number of trade agreements implemented in the world, the 1:1 match of the trade agreement and
world trade curves, and the implications of these agreements for the global marketplace. The
volume of world trade has been growing faster than world GDP, suggesting that firms are
dispersing parts of their production process to different locations around the globe. Evidence
suggests that foreign direct investment is playing an increasing role in the global economy, with
the average yearly outflow of FDI increasing from $14 billion in 1970 to $1.45 trillion in 2016.
The globalization of markets and production and the resulting growth of world trade, foreign
direct investment, and imports all imply that firms are finding their home markets under attack
from foreign competitors. In the US, demands for "protection" from foreign competitors are still
often heard, and if trade barriers decline further, this may slow the rate of globalization of both
markets and production.

Technological change
The lowering of trade barriers made globalization of markets and production a theoretical
possibility. Technological change has made it a tangible reality. Every year that goes by comes
with unique and oftentimes major advances in communication, information processing, and
transportation technology, including the explosive emergence of the “Internet of Things.”

Communications
The development of the microprocessor has enabled the growth of high-power, low-cost
computing, enabling the processing of vast amounts of information. Moore's Law predicts that
the power of microprocessors doubles and the cost of production falls every 18 months.

Internet of things
The Internet has become the information backbone of the global economy, with e-commerce
retail sales surpassing $520 billion in 2020 and global e-commerce sales exceeding $2 trillion in
2017. It has enabled businesses to expand their global presence at a lower cost and coordinate
and control a globally dispersed production system.

Transportation Technology
The most important innovations in transportation technology since the 1950s have been the
development of commercial jet aircraft and superfreighters, as well as the introduction of
containerization. Containerization has revolutionized the transportation business, significantly
lowering the costs of shipping goods over long distances. This has made it much more
economical to ship goods around the globe, leading to the globalization of markets and
production.

Implication for the globalization of production

Dell uses the Internet to coordinate and control a globally dispersed production system, and uses
air transportation to speed up the delivery of critical components. It also outsource its customer
service operations to India, where English-speaking service personnel handle the calls.
Implications for globalization of markets
Low-cost global communications networks, low-cost transportation, and low-cost jet travel have
enabled the mass movement of people between countries, bringing about convergence of
consumer tastes and preferences. This has led to the emergence of global markets for consumer
products, but significant national differences remain in culture, consumer preferences, and
business practices.

Reading Materials:

1. Will Covid-19 Have a Lasting Impact on Globalization?

Summary: The pandemic has caused the largest and fastest decline in international flows —
including trade, foreign direct investment, and international travel — in modern history. While
these numbers imply a major rollback of globalization’s recent gains, they don’t necessarily
signal a fundamental collapse of international market integration. But how deep will the plunge
really be? How fast can we expect global flows to rebound? And how might future flow patterns
look different from the past? Leaders can find clues about the future and actionable implications
for their companies by focusing on five key drivers of globalization’s trajectory: 1) global
growth patterns; 2) supply-chain policies; 3) superpower frictions and fragility; 4) ongoing
technical shifts; and 5) public opinion.
2. The Globalization of Markets
Summary: Companies that lack global focus and remain inattentive to the economics of
simplicity and standardization are most endangered in a world with homogenized demand.
Global competition forces companies to offer standardized products that are advanced,
functional, reliable, and low priced, leading to economies of scale and reduced world prices.The
world is living in a Republic of Technology, driven by convergence, with standardized products
being sold in the same way everywhere, making the multinational corporation obsolete and the
global corporation absolute.

Also,
3. A brief history of globalization
4. Globalization Benefits and Challenges