Many people think of globalization as the transfer of jobs to foreign countries. While this is certainly one part of globalization, a true definition would have to include the interconnectedness of everything around us. The interconnections are evidence of the true nature of globalization.
Especially in the free world, very little is produced or created in only one country. Parts, labor, and transport almost always cross international lines at some point in the product cycle. Even service industries are affected by globalization. Many services, or parts of the service, are now performed by people or companies in foreign lands. This is especially true since the internet has made borders disappear and places even the smallest companies in front of potentially millions of customers.
Major Drivers of Globalization
Communications advances, specifically the internet, are certainly one of the major drivers of globalization. The ease of conducting business across the internet and the equalizing effect allows smaller businesses located worldwide to compete with larger firms.
Transportation is another major driver of globalization. In fact, without the inventions of the jet airline, super-freighters, and containerization (Hill, 2009), costs and time would be increased for doing business outside the local area, thus eliminating any advantage for globalization. Transportation, along with technology, has made the world a much smaller place, and much easier to do business in.
Tariffs and regulations
A third driver of globalization is the reduction in both tariffs and regulations. Most advanced nations have lowered or eliminated trade barriers. The global issue of tariffs and regulations has been codified in the General Treaty on Tariffs and Trade (GATT), specifically the eighth round commonly called the Uruguay Round (Hill, 2009). The GATT is a broad set of standards covering everything from products, services, trademarks, patents, copyrights, and other trade related issues. Under the GATT, tariffs in 7 Western countries and Japan have dropped from an average of 22.6% in 1913, to 3.5% in 2005 (World Trade Organization, 2005, as cited in Hill). By lowering barriers to trade, a more attractive business climate for foreign companies and products is created.
Effects of Globalization
Globalization presents both challenges and opportunities. Since the news media tends to focus on bad news, the average person only hears about the negative aspects of globalization. Certainly many effects of globalization that help consumers and businesses can be found, and while many scream about losing jobs, they certainly do not mind the cheaper products and services which result from globalization.
A company can benefit from globalization by entering new markets. This has the effect of increasing not only brand presence, but potential customers. This is also a two edged sword, foreign companies can enter the domestic markets as has been evidenced by the consumer electronics industry and the automobile industry.
One of the most obvious effects of globalization is price. Not just the final price of the product or service, but the price at all stages of the product cycle. Many economists point out that the market reaches optimal efficiency when artificial barriers to trade are removed. This certainly applies to globalization. Companies can concentrate on their strengths and outsource their weaknesses to the cheapest, most efficient, and possibly foreign company. This has the net effect of lowering prices in most non-monopolistic industries.
Much has been made about jobs in the global economy. While a factory closure in one country causes very visible job losses in the community, most economists again point out that globalization is generally a net boost for jobs in the domestic market. In fact, Simon Cox points out that while trade displaces workers in industrialized countries, corporate investment in foreign countries creates new jobs by increasing demand for their own products (Cox, 2006). Of course, for the employee who is downsized, this fact is not comforting.
Privacy and Security
With more of the service industry in the United States going to overseas companies and employees, the issues of privacy and security become much more important. From tax returns to medical diagnosis, a growing amount of private information is flying through the internet. Foreign entities do not have to follow the same laws that are present in the host country. What happens if private medical or tax records get posted on the internet or leaked to the news media? Certainly the company contracting the information could be held liable, but often little can be done to the entity which disclosed the information.
The same holds true with security. Increasingly more engineering is done in other countries, even the United States Department of Defense contracts manufacturing and weapons design to non United States companies. What happens if these once friendly countries suddenly switch sides? What about a rogue employee or executives? These questions raise serious issues about the current trend in business and government to allow the market to have free rein in the quest for ever cheaper products and services.
Regional Trading Blocs
Regional trading blocs are areas of free trade created by treaty. Other reasons for regional trading blocs exist as well. One reason is to form barriers to businesses not in the trading bloc and promote those that are. Some trade blocs, like the European Union (EU), have loftier goals of formulating not just economic treaties, but social and political conformity as well.
Perhaps the best known trading bloc in the United States is the North American Free Trade Agreement (NAFTA). NAFTA was signed into law on January 1, 1994 and lowers or eliminates tariffs between the United States, Canada, and Mexico on most products within 15 years (United States Department of Agriculture [USDA], 2008).
The United States is also involved with other Central American and Caribbean countries under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR). This bill is meant to lower barriers to United States agricultural products, with the complete elimination of agricultural tariffs with only four exceptions the final goal. The CAFTA-DR also leveled the playing field for United States companies in the CAFTA-DR treaty by dropping tariffs in host countries and allowing service providers and investment opportunities to enter the region.
Proponents of CAFTA-DR and NAFTA are hoping these treaties can be the model for a hemisphere-wide Free Trade Area of the Americas (FTAA) treaty. The FTAA would be the largest free trade area in the world with 34 economies, dwarfing even the EU (Enterprise Florida, 2008).
Cox, S. (Ed.). (2006). Economics: Making sense of the modern economy (2nd ed.). London: Profile Books Ltd..
Enterprise Florida (2008). What is CAFTA. Retrieved September 25, 2008, from http://www.caftaintelligencecenter.com/subpages/What_is_CAFTA.asp
Hill, C. W. (2009). International business: Competing in the global marketplace (7th ed.). New York: McGraw-Hill/Irwin.
United States Department of Agriculture (2008). North American Free Trade Agreement (NAFTA). Retrieved September 25, 2008, from http://www.fas.usda.gov/itp/Policy/nafta/nafta.asp