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CHAPTER 27

IS GLOBALIZATION A BAD WORD?

Comparative Advantage, Culture Clashes, and Organizations Meant to Make the Most of Global Markets

The Reverend Martin Luther King, Jr., said of global interdependence: “We are all caught in an inescapable network of mutuality, tied into a single garment of destiny. . . . Did you ever stop to think that you can’t leave for your job in the morning without being dependent on most of the world?”¹ In all likelihood, he explained, the sponge you reach for in the bathroom is “handed to you by a Pacific Islander.” Your soap comes from a French person. Your coffee, tea, or cocoa at breakfast comes from South American, Chinese, or West African citizens. Your toast comes “at the hands of an English-speaking farmer, not to mention the baker.” And before breakfast is over, you have reaped benefits from work performed by people around the globe. Interdependence is nothing new; spices, slaves, and silk were traded across the oceans centuries ago. But as clipper ships were replaced by ocean liners and airlines that crisscross the globe every day, the cross-pollination of cultures intensified, as did the scrutiny of the resulting mutual influences. This chapter demystifies the nebulous concept of globalization and explains its benefits, such as economic incentives for cooperation and toleration, and its costs, such as exploitation and homogenization.

¹ “A Christmas Sermon on Peace,” in A Testament of Hope: The Essential Writings and Speeches of Martin Luther King, Jr., ed. James M. Washington (New York: HarperCollins, 1986), p. 254.

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One can now travel from one continent to another in the time it used to take to travel from one end of Manhattan Island to the other, and the modes of transportation are only getting faster. The Japan Aerospace Exploration Agency has completed successful tests of a supersonic jet plane that will someday carry 300 passengers from New York to Tokyo in less than 6 hours. New technologies allow instantaneous communication of information and overnight transfers of people and products around the globe, giving goods and influence a worldwide reach. In a nutshell, globalization is the creation of a worldwide scope for markets, communications, transportation, and ideas. The term has been used to convey a number of associated concepts, which include the following:

internationalization—the increase of international trade and interdependence

supraterritoriality—the deemphasis on territorial boundaries

universalization—the spread of common ideas and goods across the globe

Westernization—the migration of Western culture

British political scientist Jan Aart Scholte argues that, of these, supraterritoriality is central to the meaning of globalization, citing Milton Friedman’s observation that it has become possible “to produce products anywhere, using resources from anywhere, by a company located anywhere, to be sold anywhere.”² For example, Deere and Company produces tractors in Waterloo, Iowa, for export to 110 countries on 6 continents. Parts in its Augusta, Georgia, assembly plant come from 12 other countries. Deere also produces machinery in China for the Middle East, in Brazil for Europe, and in Germany and India for the United States. In all, the company does business in more than 160 countries.³

² See http://www.mtholyoke.edu/acad/intrel/scholte.htm.

³ See www.deere.com/en_US/compinfo/speeches/2005/050419_lane.html.

Our company buys denim in North Carolina, ships it to France where it is sewn into jeans, launders these jeans in Belgium, and markets them in Germany using TV commercials developed in England.

—Robert D. Haas, board member and former CEO, Levi Strauss & Co.⁴

⁴ “The Corporation without Boundaries,” in M. Ray and A. Rinzier, eds., The New Paradigm in Business: Emerging Strategies for Leadership and Organizational Change (New York: Tarcher/ Perigee, 1993), p. 103.

Levi’s jeans, like many other goods, are shuttled around the globe during the production process for several good reasons. As one of the first places in the world to use a cotton gin to separate seeds from fiber, North Carolina has more than 200 years of experience in the efficient production of high-quality cotton products. Barthelemy Thimonnier patented the first commercial sewing machine and ran the world’s first garment factory in France in the 1830s.⁵ Having given the world denim as well, France knows a thing or two about sewing jeans. Belgium and England may not have enjoyed a first-mover advantage in commercial laundering or advertising—Texas claims the first Laundromat and New York claims the first advertising firm⁶—but they benefit from available resources and expertise in these tasks.

⁵ See www.ismacs.net/smhistory.html. Ironically, tailors eventually ran Thimonnier out of the country, fearing that his invention would cause them to lose their jobs.

⁶ See http://www.jwt.com/contacts.html.

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When one country can make a good at a lower opportunity cost, meaning that it gives up less of other goods for each unit, it has a comparative advantage in producing that good. When a country can make more of a product than another country with the same resources, the more productive country has an absolute advantage. David Ricardo reasoned that each country should specialize in the goods and services that it can produce most readily and cheaply and should trade those goods and services for those that foreign countries can produce more efficiently. For example, India excels in information technology (IT) services, and, because of this, about half of the Fortune 500 companies are clients of Indian IT firms.⁷ Chile’s warm winters and hard-working, low-paid workers give that country an advantage in the labor-intensive production of fresh fruits and vegetables, and Chile grows more than 1 million metric tons of fresh table grapes each year, mostly for export.⁸ The American Midwest has a comparative advantage in wheat production: Thanks to its rich soil and moderate temperatures, the region exports 28.5 million metric tons of wheat annually.⁹

⁷ See www.atimes.com/atimes/South_Asia/GK04Df02.html.

⁸ See www.fas.usda.gov/htp/horticulture/Grapes/Table%20Grape%20Situation%20and%20Outlook%202005.pdf.

⁹ See www.nationmaster.com/country/us/Agriculture.

One of Ricardo’s insights was that whenever a country has a comparative advantage over another country in the production of a good, it is a certainty that both countries can benefit from specialization and mutual trade. Consider the trading partnership between Canada and Japan. Both of those countries can produce cars and paper. However, Canada has millions of square miles of forested land and established systems of efficient forest management that yield high volumes of wood pulp for the production of about 20 million tons of paper per year.¹⁰ Japan has focused on the development of an automobile industry that produces cars quickly and efficiently and produces more than 10 million cars per year.¹¹

¹⁰ See www.cofi.org/reports/factbook2000/Pages%20from%20FACTBOOK%202000-12.pdf.

¹¹ See www.findarticles.com/p/articles/mi_m3012/is_7_184/ai_n6140525.

Suppose that Canada could produce 20 million tons of paper if it made no cars and that by devoting all its resources to making cars instead, it could make 20 million cars and no paper, thus giving up 1 ton of paper for each car made. Suppose also that Japan could make 10 million cars if it made no paper, and if it devoted all its resources to making paper instead, it could make 2 million tons of paper for an opportunity cost of 5 cars per ton of paper made. Canada’s relative abundance of forests means that by releasing the labor, machinery, and other inputs required to make 1 car, it can make 5 times more paper than Japan can per car given up. Although Canada could make more of either good than Japan, the comparative advantage in car production is held by Japan, where each car causes the loss of one-fifth ton of paper compared to the loss of a full ton of paper per car in Canada. Canada has a comparative advantage in paper production, with each ton of paper causing the loss of 1 car instead of 5. Because a comparative advantage exists, both countries can benefit from trade.

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If Canada trades paper for cars at a rate of, say, 2 cars per ton of paper, Canada gets twice as many cars per ton of paper as it could attain without trading (on its own it can make only 1 car per ton of paper given up), and Japan trades 2 cars per ton of paper rather than giving up 5 cars per ton of paper, as it would without trade. Suppose that acting independently, Canada would produce 10 of each product and Japan would produce 1 ton of paper and 5 cars. As an example of the mutual benefits attainable with trade, Canada could produce 13 tons of paper and 7 cars, Japan could produce 10 cars and no paper, and then 2 tons of paper from Canada could be traded for 4 cars from Japan. That would leave Canada with 13 − 2 = 11 tons of paper and 7 + 4 = 11 cars, whereas Japan would have 2 tons of paper and 10 − 4 = 6 cars. As summarized in the accompanying table, trade allows both countries to have more of each product.

The benefits of globalization extend beyond the efficiency of specialization and trade. Shared information serves as a public good for those who would otherwise have to reinvent solutions, cures, products, and processes on their own. International collaborations can contribute to the success of projects of grand importance, as with the International Space Station, efforts to track and propagate endangered species, and cures for deadly diseases. Cooperation also permits the spreading of risk. International organizations can pool funds and disburse them for relief from disasters, including oil spills, droughts, cyclones, famines, and floods. When a devastating tsunami hit Indonesia in 2004, international disaster-relief teams from more than 80 established organizations arrived to provide assistance.¹² Cooperative educational efforts include the work of the United Nations Educational, Scientific, and Cultural Organization (UNESCO). UNESCO’s nearly 200 member nations have the goal of “education for all” by the year 2015.¹³

¹² See www.cnn.com/2004/WORLD/asiapcf/12/28/tsunami.aidsites/.

¹³ See www.unesco.org.

Finally, economic cooperation is a strong disincentive for bloodshed between nations. France and the United Kingdom (U.K.) have an ongoing spat, but it’s unlikely to come to military strikes because the two nations are economically interdependent. France receives more than $35 billion in annual trade revenues from the U.K. and purchases more than $32 billion worth of U.K. goods.¹⁴ When contemplating aggression against each other, these countries would have to add the enormous trade revenues and benefits from imports to the other economic and political ramifications of war before deciding to take that route. Growing interdependence thus provides growing disincentives for avoidable belligerence.

¹⁴ See www.fco.gov.uk/Files/kfile/UK-France%20trade%20in%202004%20-%20June%202005.pdf.

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It’s not free trade, it’s stupid trade.

—Craig Romero, Republican candidate for Louisiana’s 3rd congressional district, on the Central American Free Trade Agreement

Despite the potential gains from cooperation, there is fervent opposition to globalization in many circles. Critics worry that the influence of multinational corporations rivals or trumps that of democratically elected representatives and concentrates power among those driven by profit. Intensified globalization might lead to a relatively homogeneous world market, causing cultures to lose their identities. And production might be shifted to countries that have low environmental or humanitarian standards, so that the exploitation of human and natural resources might be increased. This section explores the potential harm that could stem from the current trends in globalization.

The expansion of some cultures has led to the contraction of others. Some languages and dialects have been lost forever, and people in 121 countries now can eat food served by McDonald’s. To critics of globalization, fast-food franchises are symbolic of a broader dissemination of unhealthy and unsustainable Western lifestyles. Seductive corporate advertising and contagious materialistic values could create a world in which everyone consumed at the rate of Western countries—and that would require the resources of at least five planets similar to earth.¹⁵ Other things being equal, we might expect high-consumption countries also to be on the receiving end of influence, gaining ideas about how to live simply from countries with more sustainable economies. However, with an imbalance in marketing savvy, such a balance in influence is less likely. Aside from health and resource issues, homogeneous cultures would be dull.

¹⁵ To learn how many planets would be needed if everyone lived like you, see www.myfootprint.org/.

Critics also argue that, in practice, globalization has perpetuated the imbalance of economic benefits rather than spreading the benefits far and wide. In the 1990s, the share of global income going to the poorest people in the world dropped from 2.3 percent to 1.4 percent.¹⁶ Without adequate policies to prevent the practice, profit-maximizing firms could shop for production sites in countries where labor or environmental protection standards are low. In this respect, Dong-Sook S. Gills found that increased globalization has led to the exploitation of female workers in Asia,¹⁷ and Susmita Dasgupta, Nlandu Mamingi, and Craig Meisner found that globalization promoted pesticide use in Brazil, particularly on export crops.¹⁸ Modern trade agreements, such as the North American Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement (CAFTA), typically include provisions meant to protect humanitarian and environmental interests; the difficulty of monitoring and enforcement, among other problems, has meant limited success. (For more concerns about CAFTA and other free-trade agreements, see www.stopcafta.com.)

¹⁶ See http://news.bbc.co.uk/1/hi/special_report/1999/02/99/e-cyclopedia/711906.stm.

¹⁷ “Globalization of Production and Women in Asia,” Annals of the American Academy of Political and Social Science (2002), 581, 106–120.

¹⁸ “Pesticide Use in Brazil in the Era of Agroindustrialization and Globalization,” Environment and Development Economics (2001), 6:4, 459–482.

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Some workers believe that, by deemphasizing international boundaries, globalization invites levels of immigration and outsourcing that threaten domestic employment. The importance of these contentious topics warrants dedicated coverage of outsourcing in Chapter 23 and of immigration in Section 13 Economics by Example.

The power and influence of governments tend to erode outside of national boundaries, causing a relative void of authority and changing the formula for successful policy initiatives at the international level. Even the strongest armies have difficulty enforcing policies among rogue nations, and international law is only as binding as the multinational commitments to support it. At the same time, vital interests in the benefits of economic cooperation, in the ethical treatment of labor, and in the avoidance of global environmental catastrophes have spawned several organizations of considerable strength and controversy to offer international oversight.

The United Nations (UN) was founded in 1945 with 51 member countries and a charter “to maintain international peace and security; to develop friendly relations among nations; to cooperate in solving international economic, social, cultural and humanitarian problems and in promoting respect for human rights and fundamental freedoms; and to be a centre for harmonizing the actions of nations in attaining these ends.”¹⁹ The organization now boasts 191 member countries, 15 agencies, and an extensive array of programs and bodies. The UN “family of organizations” includes the Global Program on Globalization, Liberalization, and Sustainable Human Develo-pment; the Inter-Agency Committee on Sustainable Development; the International Seabed Authority; the UN Food and Agriculture Organization; and the UN Environment Program. At the 2001 World Economic Forum in Switzerland, UN Secretary-General Kofi Annan challenged world business leaders to “embrace and enact” the principles of the UN Global Compact.²⁰ Covering human rights, labor, and the environment, the compact’s principles include the development and use of environmentally friendly technologies, initiatives to promote greater environmental responsibility, and support for a “precautionary principle” of erring on the safe side when dealing with uncertain outcomes. The latest activities of UN organizations are summarized on-line at http://www.unsystem.org/.

¹⁹ See www.un.org/aboutun/basicfacts/unorg.htm.

²⁰ See www.un.org/Depts/ptd/global.htm.

The World War II–era General Agreement on Tariffs and Trade (GATT) reduced barriers to the international trade of merchandise, which now represents 40 percent of global production and 80 percent of global trade. In 1995, the World Trade Organization (WTO) replaced GATT as the global authority on rules of international trade. The WTO administers GATT principles and extends them with policies negotiated among its 144 member nations. Among these, the General Agreement on Trade in Services (GATS) is the service-industry equivalent to GATT. The objectives for GATS and GATT are to create “a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants . . . ; stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.”²¹

²¹ See www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm.

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The WTO has come under fire for allegedly placing commercial interests ahead of environmental protection. The Working Group on the WTO/Multilateral Agreement on Investment claims, for example, that WTO rulings have relaxed the environmental standards for Venezuelan oil refineries, undercut U.S. requirements that shrimp be caught using specific turtle-safe excluding devices, and neglected precautionary policies that call for the WTO to prepare for the worst in the context of environmental concerns. Whatever the intent and result of current WTO actions, the repercussions of globalization were certainly on the minds of its architects. The preamble to the 1994 Marrakech Agreement establishing the WTO states that

relations in the field of trade and economic endeavor should be conducted . . . while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.²²

²² See www.econ.iastate.edu/classes/econ355/choi/wtomara.htm.

In support of this goal, umbrella clauses, such as Article 20 of the GATT, permit countries to act in the defense of human, animal, or plant life or health and to conserve nonrenewable natural resources.

Financial ministers from 45 governments gathered in Bretton Woods, New Hampshire, in 1944 as architects of the modern international economy. With fresh wounds from the Great Depression and World War II, they sought economic stability and revitalization for their countries. One result was the creation of the World Bank to assist with rebuilding war-torn Europe. With that task completed, the World Bank turned to less-developed countries, aiming to envelop them in the global economy and to reduce poverty by providing low- or no-interest loans for education, health, infrastructure, and communications. The World Bank and its 184 member countries also work together to combat negative repercussions of globalization, such as the spread of avian flu across borders.²³

²³ See www.worldbank.org/.

As with all other international organizations and agreements, the World Bank has no shortage of detractors. There are charges that the World Bank actually exacerbates the problems of globalization by hastening development, promoting materialism, and neglecting environment health.²⁴

²⁴ See www.worldbankboycott.org.

Like the World Bank, the International Monetary Fund (IMF) was conceived as part of the Bretton Woods agreement. It serves as a stabilizing force for the currencies and economies of its 184 member countries by overseeing exchange-rate policies, lending to countries with balance-of-payment problems, and assisting with the development of monetary and fiscal policy.²⁵

²⁵ See www.imf.org.

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The IMF defends globalization, saying that it transformed East Asia from one of the poorest areas to an area of greater prosperity: “And as living standards rose, it became possible to make progress on democracy and economic issues such as the environment and work standards. By contrast, in the 1970s and 1980s when many countries in Latin America and Africa pursued inward-oriented policies, their economies stagnated or declined, poverty increased and high inflation became the norm.”²⁶

²⁶ See www.imf.org/external/np/exr/ib/2000/041200.htm.

Critics of the IMF, such as the Global Exchange organization,²⁷ claim that the IMF and the World Bank trap countries by luring them into debt and then placing unwarranted demands on them. There are also concerns that the IMF causes poor countries to promote sweatshops and to accept exploitative inroads by large Western corporations. What is certain is that these organizations have come to symbolize desired order and assistance for some and the pursuit of selfish ideals for others.

²⁷ See www.globalexchange.org/campaigns/wbimf/facts.html.

Innovations in travel and communications make the world’s distances easily surmountable, and sharing has become commonplace in what communications theorist Marshall McLuhan dubbed “the global village”—a world made smaller by electronic media. Globalization brings with it the efficiency of specialization based on comparative advantage, an information superhighway leading in the direction of better understanding, and incentives for the civilized resolution of disputes. It also creates threats to the status quo, a longer reach for powerful multinational corporations (Microsoft Corporation now writes software that runs 95 percent of the world’s computers),²⁸ and an extended scope for uncivilized disputes (32 countries have current or impending access to long-range ballistic missiles²⁹).

²⁸ See www.bloomberg.com/apps/news?pid=10000086&sid=aZLWBOYKBK.o&refer=latin_america.

²⁹ See www.armscontrol.org/factsheets/missiles.asp.

Perspectives on whether globalization provides a net gain depend on the observers’ interests and priorities. With the aim of making the most of globalization, the world’s nations seek policy guidance from international organizations with good intentions but checkered histories. The UN, IMF, WTO, and World Bank face the ever-present possibility for corruption and the daunting challenge of reconciling differences in a world in which the ability to meet face-to-face has grown faster than the ability to see eye-to-eye.