CHAPTER 2:

Structures of
Globalization
The Global Economy
 TABLE OF CONTENTS

Chapter 2: Structures of Globalization - The Global Economy

A. Economic Globalization
B. Drivers of Economic Globalization
C. Economic Integration
D. Types of Regional Economic Integration
E. Reasons of Economic Integration
 A. ECONOMIC GLOBALIZATION

Economic globalization refers to the

increasing interdependence of world
economies as a result of the:
● growing scale of cross-border trade
of commodities and services
● flow of international capital
● wide and rapid spread of
technologies
 Quick History of Globalization
Silk Roads

Spice Routes

Age of Discovery

First wave of globalization

The world wars

Second and third wave of globalization

Globalization 4.0
 A. ECONOMIC GLOBALIZATION

People have been trading goods for almost as long as they’ve been around. But as of the 1st century BC, a remarkable
phenomenon occurred. For the first time in history, luxury products from China started to appear on the other edge of the
Eurasian continent – in Rome. They got there after being hauled for thousands of miles along the Silk Road. Trade had stopped
being a local or regional affair and started to become global.

That is not to say globalization had started in earnest. Silk was mostly a luxury good, and so were the spices that were added to
the intercontinental trade between Asia and Europe. As a percentage of the total economy, the value of these exports was tiny,
and many middlemen were involved to get the goods to their destination. But global trade links were established, and for those
involved, it was a goldmine. From purchase price to final sales price, the multiple went in the dozens.The Silk Road could prosper
in part because two great empires dominated much of the route.
Silk Roads
 A. ECONOMIC GLOBALIZATION

Muslim traders already dominated Mediterranean and Indian Ocean trade

European explorers connected East and West – and accidentally discovered the Americas by Columbus

Great Britain had started to dominate the world both geographically, through the establishment of the British Empire, and
technologically, with innovations like the steam engine, the industrial weaving machine and more. It was the era of the First
Industrial Revolution.

The “British” Industrial Revolution made for a fantastic twin engine of global trade. On the one hand, steamships and trains
could transport goods over thousands of miles, both within countries and across countries. On the other hand, its
industrialization allowed Britain to make products that were in demand all over the world, like iron, textiles and manufactured
goods. “With its advanced industrial technologies,” the BBC recently wrote, looking back to the era, “Britain was able to attack
a huge and rapidly expanding international market.
Spice Routes
 A. ECONOMIC GLOBALIZATION

It was a situation that was bound to end in a major crisis, and it did. In 1914, the outbreak of World War I brought an end to just
about everything the burgeoning high society of the West had gotten so used to, including globalization. The ravage was
complete. Millions of soldiers died in battle, millions of civilians died as collateral damage, war replaced trade, destruction
replaced construction, and countries closed their borders yet again.

In the years between the world wars, the financial markets, which were still connected in a global web, caused a further
breakdown of the global economy and its links.
 A. ECONOMIC GLOBALIZATION

The end of the World War II marked a new beginning for the global economy. Under the leadership of a new hegemon, the
United States of America, and aided by the technologies of the Second Industrial Revolution, like the car and the plane, global
trade started to rise once again.

Institutions like the European Union, and other free trade vehicles championed by the US were responsible for much of the
increase in international trade. New technology from the Third Industrial Revolution, the internet, connected people all over
the world in an even more direct way.
 A. ECONOMIC GLOBALIZATION

That brings us to today, when a new wave of globalization is once again upon us. In a world increasingly dominated by two
global powers, the US and China, the new frontier of globalization is the cyber world. The digital economy, in its infancy during
the third wave of globalization, is now becoming a force to reckon with through e-commerce, digital services, 3D printing. It is
further enabled by artificial intelligence, but threatened by cross-border hacking and cyberattacks.

At the same time, a negative globalization is expanding too, through the global effect of climate change. Pollution in one part
of the world leads to extreme weather events in another. And the cutting of forests in the few “green lungs” the world has left,
like the Amazon rainforest, has a further devastating effect on not just the world’s biodiversity, but its capacity to cope with
hazardous greenhouse gas emissions.

Source: https://www.weforum.org/agenda/2019/01/how-globalization-4-0-fits-into-the-history-of-globalization/
Cross-Border Trade
Border trade, in general, refers to the flow of goods and services across the
international borders between jurisdictions. In this sense, it is a part of normal legal
trade that flows through standard export/import frameworks of nations. However
border trade specifically refers to the increase in trade in areas where crossing
borders is relatively easy and where products are significantly cheaper in one
place than another, often because of significant variations in taxation levels on goods
such as alcohol and tobacco.
Examples:

Ø Ukraine and Russia

Ø Norway and Denmark/Sweden/Finland/Russia/Estonia - excise tax on alcohol is lower in Estonia than in Finland
and much lower than in Sweden, thus it is common to buy large volumes of alcohol when returning from Estonia
Ø Significant amount of border trade in marijuana between the Netherlands, where cannabis is essentially legal, and
surrounding countries such as Belgium, Germany, and France.
Ø Lithuania and Poland - buying food is cheaper in Poland than in Lithuania.
Ø Canada Mexico and the United States - Cross-border shopping is robust. The North American Free Trade
Agreement (NAFTA) has reduced barriers and tariffs, facilitating cross-border trade.

Consumers take part in cross-border trading to:

- broaden their product selection
- gain access to a larger market place
- take advantage of currency volatility

Online commerce has taken on a more prominent role in recent years and gives consumers a convenient platform
for cross-border shopping.
Flow of international capital

Capital flows refer to the movement of

money for the purpose of investment,
trade, or business operations.

On a larger scale, a government directs

capital flows from tax receipts into
programs and operations and through
trade with other nations and
currencies
Wide and Rapid spread of technologies
 B. DRIVERS OF ECONOMIC GLOBALIZATION

Multinational
Corporations
Advancement of (MNCs) Financial
Science and Sector
Technologies
B. Drivers of Economic Globalization
Advancement of Science and Technologies

Reduced cost in transportation and

communication makes it possible to organize
and coordinate global production which
makes the concept of national boundaries and
distance for certain economic activities
meaningless.
 B. Drivers of Economic Globalization
Advancement of Science and Technologies...
Today’s ocean shipping cost is only a half of that in the year 1930, the current airfreight 1/6, and
telecommunication cost 1%. The price level of computers in 1990 was only about 1/125 of that in 1960, and this
price level in 1998 reduced again by about 80%. This kind of ‘time and space compression effect’ of
technological advancement greatly reduced the cost of international trade and investment, thus making it
possible to organize and coordinate global production.

For example, Ford’s Lyman car is designed in Germany, its gearing system produced in Korea, pump in USA, and
engine in Australia. It is exactly thetechnological advancement that has made this type of global production
possible.

Moreover the development of the networking-based economy has given birth to a large group of shadow
enterprises, making the concept of national boundaries and distance for certain economic activities
meaningless.
 B. Drivers of Economic Globalization
Multinational Corporations (MNCs)

Multinational Corporations (MNCs) are

globally organizing production and allocating
resources according to the principle of profit
maximization . Their global expansions are
reshaping macroeconomic mechanisms of the
operation of the world economies.

Principle of profit maximizations the capability of a business or company to earn the maximum profit with low cost which is considered as
the chief target of any business and also one of the objectives of financial management.
 B. Drivers of Economic Globalization
Multinational Corporations (MNCs)...

In 1996, there were altogether only more than 44,000 MNCs in the whole world, which had 280,000 overseas
subsidiaries and branch offices. In 1997, the volume of the trade of only the top 100 MNCs already came up to 1/3 of
the world’s total and that between their parent companies and their subsidiaries took up another 1/3. In the US$
3,000 billion balance of foreign direct investment at the end of 1996, MNCs owned over 80%. Furthermore, about
70% of international technological transfers were conducted among MNCs.
B. Drivers of Economic Globalization
Financial sector

A section of the economy which is made up of firms

and institutions that provide financial services to
commercial and retail customers . The sector is
comprised of many different industries including
banks, investment companies, insurance companies,
and real estate firms. It advances loans for
businesses so they can expand, grants mortgages to
homeowners, and issues insurance policies to
protect people, companies, and their assets.
 B. Drivers of Economic Globalization
Financial sector...

Globalization of the financial sector has become the most rapidly developing and most influential aspect of
economic globalization. International finance came into being to serve the needs of international trade and
investment activities. However, along with the development of economic globalization, it has become more and
more independent.

Compared with commodity and labor markets, the financial market is the only one that has realized globalization
in the true sense of ‘globalization’.

In order for an economy to remain stable, it needs to have a healthy financial sector. This sector advances loans
for businesses so they can expand, grants mortgages to homeowners, and issues insurance policies to protect
people, companies, and their assets. It also helps build up savings for retirement and employs millions of people.
 C. ECONOMIC INTEGRATION
It is a process in which two or more states in a broadly defined geographic
area reduce a range of trade barriers to advance or protect a set of economic
goals.

Economic integration reduces or eliminates

trade barriers among nations and coordinates
monetary and fiscal policies the aim is to reduce
costs for consumers and producers as well as to
increase trade between the countries participating in
the agreement.

The more integrated economies become the fewer

trade barriers exist and the more politically
coordinated they are. Countries can agree to
different levels of economic integration.
D. TYPES OF REGIONAL ECONOMIC INTEGRATION

Free Trade Common

Area Market
Customs Economic
Union Union
 Free Trade Area
This is the most basic form of economic cooperation. Member countries
remove all barriers to trade between themselves but are free to
independently determine trade policies with nonmember nations.
A free trade area is a bloc in which countries reduce or remove
tariffs on all goods among member nations.

The most basic type of economic integration is a simple free-trade area. In

this form, attention is focused almost exclusively on a reduction of the
tariffs and quotas that restrict trade. Emphasis is placed almost entirely on
increasing the exchange of goods. The articulation of transnationalized
production chains, trade in services, labour mobility, and more-
sophisticated forms of economic integration are not an explicit goal and
emerge as merely tangential to the primary goal of securing access to
foreign markets for domestic firms.

In a second-generation free-trade area, the basic nature of simple free

trade is expanded to include trade in non-goods such as services such as
transferability of professional certifications as well as questions of labour
mobility, particularly for the highly skilled professions such as legal,
accounting, technology, and medical services.
 Free Trade Area
The North American Free Trade Agreement
(NAFTA) was an agreement signed by Canada,
Mexico, and the United States that created a
trilateral trade bloc in North America.

Most-favored-nation (MFN) status is an

economic position in which a country enjoys the best
trade terms given by its trading partner.That means it
receives the lowest tariffs, the fewest trade barriers,
and the highest import quotas (or none at all). In
other words, all MFN trade partners must be treated
equally.
Customs Union
This type provides for economic
cooperation as in a free-trade zone.
Barriers to trade are removed
between member countries. The
primary difference from the free
trade area is that members agree to
treat trade with nonmember
countries in a similar manner.
Common Market
This type allows for the creation of
economically integrated markets between
member countries. Trade barriers are removed,
as are any restrictions on the movement of
labor and capital between member countries.
Like customs unions, there is a common trade
policy for trade with nonmember nations. The
primary advantage to workers is that they no
longer need a visa or work permit to work in
another member country of a common market.

A common markets bloc freely exchange all goods

services labour and capital
 Common Market
Common Market for Eastern and Southern
Africa (COMESA).

A regional economic community in Africa

with twenty-one member states
stretching from Tunisia to Eswatini.
 Common Market
Common Market for Eastern and Southern Africa (COMESA)...

The history of COMESA began in December 1994 when it was formed to replace the former Preferential Trade
Area (PTA) which had existed from the earlier days of 1981. COMESA (as defined by its Treaty) was established ‘as
an organisation of free independent sovereign states which have agreed to co-operate in developing their
natural and human resources for the good of all their people’ and as such it has a wide-ranging series of
objectives which necessarily include in its priorities the promotion of peace and security in the region.

However, due to COMESA’s economic history and background its main focus is on the formation of a large economic
and trading unit that is capable of overcoming some of the barriers that are faced by individual states..
Economic Union

This type is created when countries enter

into an economic agreement to remove
barriers to trade and adopt common
economic policies.
Economic Union
European Union (EU)
 Economic Union
Eurasion Economic Union (EAEU)
The EAEU is an economic union of states
located in Eastern Europe, Western Asia,
and Central Asia. The Treaty on the
Eurasian Economic Union was signed by
the leaders of Belarus, Kazakhstan, Russia,
Armenia and Kyrgyzstan.
 E. REASONS OF ECONOMIC INTEGRATION

Peace
Efficiency Externalization
Security

Political Reactive
Factor Regionalism
Reactive regionalism is also referred to as defensive regionalism,
suggesting that states choose to pursue economic integration to
protect their shared interests from a specific or nebulous (not clear or
difficult to see) external threat.
Disclaimer: Images used in
this material are not mine.
Credits to the owner.