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Economic Globalization

Terms in this set (23)

Advancements in technology helped global trade achieve new heights in the twenty-first century. The Internet has transformed interactions between producers, retailers, suppliers, and consumers.

For example, a company that makes baseball hats can use the Internet to work with manufacturers and suppliers from around the world. The same company can use the Internet to market its hats to consumers. When it's time to ship the product to the consumer, the Internet becomes a tool for tracking local and global shipments.

Today's consumers want the products they order delivered quickly. To keep up with consumer demands, companies have had to develop more efficient methods of finding products and parts, tracking inventory, warehousing items, and providing customer service.

Developments in air freight and other shipping methods have allowed businesses to quickly move goods from production facilities to markets around the world. Well-organized and speedy transportation is crucial for the timely delivery of products.

New technologies helped develop economic globalization. But international trade wouldn't have grown without supportive national policies and trade organizations. For example, the United States, Mexico, and Canada created a strong business relationship when they entered into the North American Free Trade Agreement (NAFTA). Under this agreement, goods aren't taxed when they're traded between the three countries.

International organizations such as the World Trade Organization and the International Chamber of Commerce also support global trade by promoting ethical practices.
As free trade gained acceptance, institutions formed to encourage and regulate global trade. In 1948, the United States helped establish the General Agreement on Tariffs and Trade (GATT). The GATT's goal was to reduce trade barriers. It encouraged nations to open their markets equally to all trade partners. According to GATT regulations, if a nation reduced the tariff for one trade partner, the reduction applied to all GATT member nations.

The GATT played a big role in expanding global trade until it was replaced by the World Trade Organization (WTO) in 1995. The WTO built upon the GATT's groundwork. While the GATT was an agreement, the WTO is an organization with a wider scope. It provides a forum for trade discussions and resolutions to disputes between nations. It also seeks to balance trade expansion with social and environmental well-being.

Another important development after World War II was the regulation of global finance. Organizations formed to maintain global economic stability and prevent financial crises such as the Great Depression. The International Monetary Fund (IMF) and the World Bank are two of these organizations. Both of these organizations work to increase global trade and reduce poverty. They promote job creation, the stability of currencies, and financial cooperation between nations. The World Bank group includes five institutions. One of these institutions is the International Bank for Reconstruction and Development (IBRD). Originally, the IBRD was established to revive the European economy after World War II. Once Europe was back on its feet, the IBRD began helping other nations. Today it mainly focuses on middle-income countries on all continents. It finances projects to improve living conditions. Since 1946, the IBRD has loaned more than $500 billion.

The International Monetary Fund (IMF) has 188 countries as members. The member countries of the IMF work together to promote economic stability around the world. They achieve this goal by providing loans and debt relief to member countries facing a financial crisis. When a country takes a loan from the IMF, they agree to make changes that address the problem.

Each member of the IMF is expected to give money to support the system of loans. Countries with a bigger role in the world economy, such as the United States and Germany, are expected to provide more money.
After World War II, European countries spent many years rebuilding their economies. To increase trade and reduce the possibility of a future conflict, six Western European countries developed a trade agreement. In 1957, France, West Germany, Belgium, Italy, Luxembourg, and the Netherlands signed the Treaty of Rome, which established the European Economic Community (EEC). This agreement created a shared market in which the countries agreed on tariff reductions and protections for agricultural products. Over the years, more European countries joined the EEC, and in 1993 the name was changed to the European Union (EU).

Today the European Union (EU) includes 28 European member states. The EU eliminated customs duties, or taxes, on products traded between EU countries. Without customs duties, products became more affordable.

The EU allows its citizens to cross member nations' borders without a visa or passport. It also made using money easier by introducing a common currency called the euro.

The EU works through negotiations between member nations. It also includes an organization called the European Council, which is more powerful than individual member governments.

Approximately 100 regional trade unions exist throughout the world. What sets the EU apart is that it is also a political union with a common currency and relaxed border control

Other major trade partnerships that promote free trade are the Asia-Pacific Economic Cooperation (APEC), the Mercado Comun del Sur (MERCOSUR), and the Caribbean Community and Common Market (CARICOM). APEC is an economic forum of 21 Pacific Rim member economies, including China, Japan, Australia, Russia, and the United States. MERCOSUR unites South American countries such as Brazil, Argentina, and Uruguay. Trade partnerships also exist in Africa, Central America, and the Middle East.
Globalization has greatly increased production and trade. Companies produce more goods to satisfy a larger market. The more they produce, the more they sell and earn.

With increased production, companies can afford to hire more employees. Increased employment leads to increased income and purchasing power. As people become wealthier, they also buy more goods and services, which increases demand for these goods and services.

Wealthier companies and individuals are assessed higher taxes. Increased taxes fund government development and welfare projects. Overall, creation of wealth at every level strengthens the national economy.

Globalization may help reduce production costs. Using cheaper raw materials and labor in developing countries allows companies to cut costs. They can then reduce the prices of goods and services, making them affordable for more people.

Developing countries can also benefit from globalization. When foreign companies build factories and offices in developing countries, they create job opportunities.

Globalization also works in favor of consumers by creating competition. It forces domestic businesses to compete with foreign businesses. Businesses must constantly strive to improve the quality of their product while keeping prices down. As a result, consumers enjoy higher quality products at lower prices. Also, foreign players in the market increase consumer choices.

Finally, globalization supports peace and cooperation between nations. As nations benefit from foreign trade, they depend on each other to sustain these benefits. Nations that threaten peace and security face sanctions from international trade organizations. Sanctions cut off a nation from the benefits of trade. Protecting their economies motivates nations to maintain peaceful relations.

Globalization has many benefits. But that's just one side of the story. Let's look at the disadvantages, or costs, of economic globalization.
Petroleum products derived from crude oil, such as gasoline and diesel fuel, are a main source of energy worldwide. Not only is oil required to transport goods over greater distances with greater frequency, but automobile ownership in developing countries is increasing, leading to a greater demand for oil.

In 1960, oil-producing nations formed the Organization of Petroleum Exporting Countries (OPEC). Members include Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC members control about 80 percent of the world's crude oil reserves and about 50 percent of natural gas reserves. OPEC is dominated by Arab nations, especially Saudi Arabia, as most oil reserves are within their borders.

While demand for oil changes, it remains an important resource. Controlling such an important resource has given OPEC much influence over international matters. It uses tactics such as dramatic price increases, quotas, and embargoes to sway global, economic, and political decisions in its favor. Therefore, many consider OPEC a cartel rather than a trade organization.

In 1973, the United States suffered an oil crisis when Arab nations staged an embargo against it. The United States had supplied arms to Israel in its Yom Kippur War against Arab nations. Middle Eastern nations retaliated by declaring an embargo. US gas prices increased drastically. Many gas stations ran out of gas. This dependency on other nations is a downside of globalization. The 1973 oil crisis showed how vulnerable the world was to a cartel-created energy shortage. OPEC continues to manipulate oil prices in the twenty-first century.