Lesson 1.2 Globalization of Economic Relations PDF

**Lesson 1.2: The Globalization of Economic Relations** **Lesson Summary** As globalization intensified social relations and consciousness across the globe (Steger, 2014), many drivers played significant roles in making it happen. One of these drivers refers to economics. It moves people and thing...

**Lesson 1.2: The Globalization of Economic Relations** **Lesson Summary** As globalization intensified social relations and consciousness across the globe (Steger, 2014), many drivers played significant roles in making it happen. One of these drivers refers to economics. It moves people and things from their place of origin to gain something out of such movement. This lesson discusses the essence of the integration of economies across the world. This discussion zeroes into the realm of economic globalization through the establishment of International Monetary Systems (IMS) **Learning Outcomes** At the end of the lesson, the students must be able to; 1\. State the definition of \"Economic Globalization\" and \"Internationalization.\" 2\. Explain how the International Monetary Systems emerged after the years of war. 3\. Expound the principle of \"Most Favored Nations (MFN). 4\. Assess the impacts of globalization and internalization on products that most of the students use in everyday life. **Motivation Question** Ask yourself if it would be possible for you to live comfortably without the things that you are accustomed to using, like your smartphone and your atm card? Also, would you still enjoy life thoroughly without your usual fastfood favorites like your burgers, pizza, and similar food products? **Economic Globalization.**             According to Salvatore (2007), Economic Globalization is the augmented amalgamation of economies through cross-border movements of people and things for the accumulation of goods and labor export and import. There are diverse inter-related scopes and ways of making cross-border businesses and transactions. Examples of these activities refer to the different modes of goods and services exchanges through advanced communication technologies, high-frequency trading, the inflow of capital across boundaries, and mass production of goods.  Economic globalization can be distinguished from internationalization in terms of extension of services. Internationalization refers to the addition and stretching of commercial activities of nation-states across borders, while in contrast, economic globalization is effective incorporation among different dispersed activities across the world. Hence, globalization targets to minimize trade obstacles across boundaries. Yet, internationalization cannot do the same due to the lack of incorporation of economic undertakings beyond national borders.  However, if one inquires about the origin of economic globalization, the answer could be traced to many years back, as written in the annals of history. Economic globalization is not a novel concept. As empires of the ancient and modern world began to conquer new territories around the globe in the remote and immediate past, financial interest had always accompanied those imperial military ventures.  **International Monetary Systems** **            **The International Monetary System (IMS) refers to the guidelines, practices, implements, amenities, and establishments for facilitating international payments (Salvatore, 2007). The role of the IMS is *to expedite international business dealings, especially trade and investment.* But, an IMS is not just about money or currencies. It also reflects the economic power and interests because capital is inherently political (Cohen, 2000). There was also the creation of the Gold Standard, which was first adopted by the UK in 1821. Afterward, in 1867 the United States shifted to the gold standard. Gold came to be known to guarantee a non-inflationary, stable economic environment.  **The Gold Standard** The gold standard operated as a fixed exchange rate regime, with gold as the only international reserve. Thus, participating countries in international exchanges determined the gold content of national currencies, which in turn defined exchange rates (or mint parities). In other words, universal adherence to gold convertibility created a global linkage through fixed exchange rates (Bordo and Rockoff, 1996). The 1930s was considered the darkest period of the modern economic era---competitive devaluations culminated in the devastating drop of international transactions. As a result, the original gold standard was later abandoned with its pegging system, which only allowed deflationary policies.  Another thing about living in the 1930s meant that the value of one\'s money was equivalent to the availability of gold in a government\'s treasury. It signified that the money printed for circulation had its value equal to the quantity of gold available. Yet, there was also the penchant for some governments to print more cash. However, its worth was no longer equal to the gold available in their possession. This resulted in the devaluation of currencies, which made international trade difficult. This was also one of the grounds that the gold standard was abandoned entirely by the international community. **The Bretton Woods Agreement**             In July of 1944, the Allied Nations initiated a new international monetary regime in the framework of the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, United States of America. With 44 countries acting as delegates in such gathering, the majority agreed to adopt an adjustable peg system, the gold-exchange standard. The US dollar was the only transformable currency of the time, so that it was committed to trade and purchase gold without restrictions at US\$35 an ounce. All other participating but non-convertible currencies were fixed to the US dollar. In effect, the standard of exchanges in the international market was only the US dollar. John Maynard Keynes and Harry Dexter White were considered the chief architects of the Bretton Woods agreement. As mentioned by Fernandez et al. (2018), the agreement practically aimed to establish macroeconomic stability, import-substitution, and governance reform. It is worth noting that the earlier years of the 1940s saw the world\'s devastation because of the Second World War. Hence, upon anticipating the end of the atrocities in 1944, it was proper for the allied powers and their other allies to frame new international economic policies. The newly crafted systems facilitated and regulated trade and financial agreements.  Nevertheless, one should note that the years before the Second World War also saw economic setbacks experienced by the United States. The influence of the great depression of 1929 that ran through the early years of the 1930s and the impact of the destruction of World War II made economic managers lay the foundations of three international financial institutions.  **International Financial Institutions** The delegates of the Bretton Woods Agreement initially agreed to establish three international institutions. On the one hand, the International Bank for Reconstruction and Development (IBRD) was intended to facilitate post-war reconstructions. After all, by the end of World War II, many economies around the globe were brought to the ground. The IBRD later evolved to be known as the World Bank (WB). On the other hand, the International Monetary Fund (IMF) was established to promote international financial cooperation and bolster international trade. The IMF was expected to protect the smooth functioning of the gold-exchange standard by providing short-term financial assistance in the temporary balance of payments difficulties. During the first few years of the new regime, the United States managed and maintained a surplus on its balance of payments. In the subsequent years, the US dollar became overvalued in the face of its major currency counterparts, which caused their countries to deplete US gold reserves. Later on, a significant balance of payments and trade deficits, along with inflationary pressures, forced the US to abandon the gold-exchange standard on August 15, 1971. The Smithsonian agreement was reached by a group of 10 countries (G10) in 1971 to re-establish a fixed international exchange rates systems without the backing of silver or gold and allowed the devaluation of the US dollar. This was the first time in which currency exchange rates were negotiated (Chen, 2020).  Aside from the International Monetary Fund (IMF) and the World Bank (WB), the General Agreement on Tariffs and Trades (GATT) was also a significant financial institution that emerged as an offshoot of the Bretton Woods agreement. Discussions on GATT and its transition to the World Trade Organization (WTO) will be discussed in the latter part of this lesson.  **The European Monetary System** In Western Europe, the European Economic Community (EEC) was established in 1957. It came as a result of the signing of the Rome Treaty and was considered the first significant step towards an ever close union. The six original founding members were Germany, France, Italy, Netherlands, Belgium, and Luxembourg. The six countries aimed to create a common market where goods, services, capital, and labor can move freely. Initially, the European Six did not plan any direct cooperation in finance or exchange rate policies. The collapse of the Bretton Woods System decisively prompted the creation of the European Monetary System (EMS) in 1979. The EMS was unique because neither the US dollar nor gold can play the role of the stabilization process of exchange rates. Instead, a systematic adjustable peg arrangement, the European Exchange Rate Mechanism, was created (Gros and Thygesen, 1998). The success of the EMS and the total abolishment of capital controls by the end of 1980 paved the way for the foundation of the new European Economic and Monetary Union (EMU). It was made possible through the signing of the Maastricht Treaty in 1992. By 1999, the EMU member states abandoned their national currencies. They delegated monetary policy onto a supranational level administered by the European Central Bank (ECB), whose primary goal was to maintain price stability. The first ten years of the EMU were successful. The participating countries integrated other European economies as their trade and capital transactions increased. Macroeconomic stability was restored, and the euro became the second most widely used reserve currency (European Commission, 2008).              The global financial and economic crisis of 2008-2009 became the most devastating challenge to the European Union (EU). The euro-era design flaws were so severe that it did not allow the European Central Bank (ECB) to bail out countries in dire financial straits. The ECB was not authorized to devalue its currency nor reduce domestic interest rates in case of trouble. As a response, the EU enacted a three-pillar financial rescue program in 2010 consisting of the following: (1) the European Financial Stability Mechanism; (2) the European Financial Stability Facility; and (3) the financial assistance of the IMF. Since this three-pillar system is only for the short-term, the EU decided to activate its own permanent rescue facility, the European Stability Mechanism, from 2013 onwards. **International Trade and Trade Policies. ** David Ricardo introduced the *comparative advantage* theory. He said that a country could benefit from voluntary trade, with minimal disadvantage, even if its trading partner was more effective in producing particular goods like wine and clothing. It allows the trading partner to provide the other product. But trade is not possible without politics. Thus, voluntary trade can bring about the uneven distribution of benefits and hinder the country\'s long-term development prospects. Producing lower value-added products like those coming from the agricultural economies could trigger temporary avoidance of international trade (Samuelson, 1995).  Radical theorists like Emmanuel (1972) and Amin (1976) argued that unequal exchange is a fundamental and systemic distinguishing characteristic of the modern world economy. The social division of labor helps in the economic development of the core and hinders the periphery\'s development. The core countries are the rich and industrialized countries in the world. Examples of these countries refer to the United States of America, the industrialized countries of the European Union, including Australia, Japan, and now China. The states construed as the periphery refer to the underdeveloped and developing countries in Asia, South America, and Africa. In international trade, the core nations have the tendency also to amass political power and influence over the periphery. Thus, the coalitions of potential losers of commerce provide a permanent basis for the advocacy of protectionism. Protectionism refers to government policies that restrict international trade to help domestic industries. Protectionist policies are usually implemented to improve economic activity within a local economy but can also be applied for safety or quality concerns (Chappelow, 2020). Hence, have the Philippines practiced protectionism, it could have prevented cheap goods from China through the imposition of proper or higher taxes so that the industries in the Philippines that produced the same goods with less capital can thrive in the Philippine Market. A unilateral trade order has emerged as a result of European international trading practices built upon the theory of the *Most Favored Nation *(MFN). MFN is grounded on the belief that any negotiated reciprocal tariff reductions between two parties should be extended to all other trading partners. In other words, a M**ost**-F**avored**-N**ation** (**MFN**) clause requires a country to provide any concessions, privileges, or immunities granted to one **nation** in a trade agreement to all other World Trade Organization member countries. Although its name implies favoritism toward another **nation**, it denotes the equal treatment of all countries (Kenton, 2020).The fact was that Europe\'s economies have adopted protectionism by imposing tariffs and import duties on foreign goods. On the other hand, the US became so stiff with its tariff trade restrictions until the Great Depression of the 1930s. The Reciprocal Trade Agreements Act in 1934 put a stop to any further decline in international trade. The same Act allowed the determination of trade policies that are more consistent with the principle of MFN.  **The GATT and its transition into WTO** There was a shift to multilateralism of trading that occurred with the International Trade Organization (ITO). ITO was one of the three pillars of the Bretton Woods System (the other two being the IMF and IBRD). The ITO's main concern was an ultimate free trading agreement across borders. With several nations agreeing (or forced to accept) to a world of lowered tariffs, the General Agreement on Tariffs and Trade (GATT) came into being. As mentioned by Aldama (2018), the General Agreement on Tariffs and Trade (GATT) was a system for the liberalization of trade that grew out of Bretton Woods and came into existence in 1947. It operated until 1995 when it was superseded by the World Trade Organization (WTO).  Almost after 50 years, the Uruguay Round created the World Trade Organization (WTO). WTO was launched on January 01, 1995, and became the official forum for trade negotiations. Unlike the GATT, it was a formally constituted organization with legal personality. However, massive resistance from different sectors of NGOs and anti-globalization movements protested in favor of the interests of the disadvantaged and less-developed countries. Nevertheless, it was widely presumed that the dominance of the US economy and the selfish interests of large multinational corporations had caused discriminatory practices to emerge within the auspices of the WTO. **What is WTO's Effect on the Philippines?** According to the website, Business Mirror (2019), Philippine's membership to the World Trade Organization (WTO) has been viewed by experts either positively and negatively. On the positive side, WTO allows poor and rich countries to talk to each other on how business is done as equals. After all, the WTO is a consensus-based organization that required member countries to be on board on specific issues. Smaller countries have the freedom to form coalitions to protect their interests, which does not happen in bilateral talks or negotiations. Business Mirror (2019) further adds that the WTO has facilitated developing nations, like the Philippines, magnify their business opportunities. The WTO helped in bringing down tariffs and removing non-tariff barriers worldwide. In the case of the Philippines, it enables its products to enter foreign markets with lesser financial obligations to the government of that international market. It enables Philippine producers to maximize their profits and only allocate a less significant amount of that profit to high tariffs had the WTO policies not been implemented. Yet, the same happens in the Philippines. The country could not ask for more financial benefits in the forms of significant taxes because of the lowering down of trade barriers and tariffs. Though this could have both negative and positive effects, it cannot be denied that a number of Filipinos have enjoyed the workings of the WTO through their enjoyment of foreign goods and services that they are accustomed to using at the present moment. At present, Filipinos are enjoying their iPhones and androids to connect to people anywhere in the world. They can eat what westerners eat through the entry of giant food chains in the country like McDonald\'s, KFC, and Dunking Doughnuts, to name a few. More Filipinos are driving high-end cars than compared to 30 years ago. Without WTO, these products would not be affordable to many Filipinos. Yet, every positive effect given by WTO to developing countries have also its share of negative repercussions in the long run.  On the negative side, it has also been construed that the Philippines\' membership to the WTO in 1995 was still untimely and not at the right time. For experts, the Philippine government should have first protected the interests of small businesses and institutions before immersing itself into WTO. Yet, consultations on the Philippines\' membership to the WTO had been fast track leaving behind issues that concern the interests of many Filipinos. For instance, issues on the protection of the natural environment have been significantly overlooked. As Multinational Corporations and Transnational Corporations established plants and factories in strategic parts of the countries, environmental care and labor rights have not significantly looked into. In export processing zones, Filipino workers always receive low salaries, get fewer benefits, and sometimes work in hazardous environments. With all of the promises of the WTO, a large part of the Philippine citizenry has yet to experience the fruition of such promises. At present, 25 years after the establishment of the WTO in 1995, the Philippines would have to strive to acquire the best deal that benefits the largest number of its citizens. **The Emergence of Transnational and Multinational Corporations.**             Another significant development in the realm of globalization is the emergence the global corporations. Steger (2014), as mentioned by Fernandez, et al (2018) refer to these contemporary corporations as either transnational or multinational corporations. **Multinational corporations** have investments in other countries, but do not have coordinated product offerings in each country. They are more focused on adopting their products and services to each individual local market. **Transnational corporations** are more complex organizations which have a central corporate facility but give decision making, research and development (R&D) and market powers to each individual markets (Steger, 2014). There are three basic developments that have subsequently altered global corporate character. **First** refers to the emergence and effect of digitization in Global Instant Communication. Development of products and the demand for services can now be forecast more accurately, as business can be transacted using digital media. **Second,** structural transition of world trade from producer-led product chains to buyer-driven chains. A commodity chain (buyer-driven chain) refers to the whole range of activities involved in the design, production and marketing of a product. A producer driven commodity chain (producer-led product chains) in which large, usually multinational manufacturers, play the central roles of in coordinating production networks. This is characteristic of capital and technology intensive industries such automobiles, aircraft, computers and heavy machineries. Manufacturing plants would operate in economies of scale not only confined in their home countries but to different parts of the world in which comparative advantage warrants. **Third,** the increasing role performed through the global system by financial elements and the emergence of global financial firms. Transactions done within and abroad are facilitated with ease and assured securely due to the coordination of the international banking system. Transfer of funds is smooth sailing regardless of the volume of amount (Fernandez, et al, 2018). **Conclusion** **            **This lesson is all about the International Monetary System (IMS), which is designed to facilitate and transact business and payments at the global level. After the financial chaos that rocked the world due to the Great Depression in the United States and the aftermath of the Second World War, the victorious allied countries laid out a master plan to align the world's financial activities. With the meeting of the representatives from 44 countries in Bretton Woods, New Hampshire, USA, three financial institutions emerged to facilitate international trade. These organizations were the International Monetary Fund (IMF), the International Bank for Reconstruction and Development, which later became the World Bank (WB), and the General Agreements on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO). Aside from that, the European community, through the European Central Bank (ECB), has decided to have a common market, which later on evolved into Europe having the same currency (Britain excluded). The Philippines' inclusion of the WTO membership has both positive and negative repercussions. Nevertheless, the country just needs to get the best deal available for the country in any international financial and political dealings.