6.2 International trade and globalization

International trade and globalization shape our interconnected world economy. From comparative advantage to multinational corporations, these forces drive economic growth, cultural exchange, and global interdependence.

Trade agreements and economic theories explain how nations interact in the global marketplace. While offering benefits like increased efficiency and access to goods, globalization also presents challenges such as job displacement and cultural homogenization.

Absolute vs Comparative Advantage

Understanding Economic Advantages

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• Absolute advantage means a country produces goods or services more efficiently than others, using fewer resources
  • Requires less labor, capital, or natural resources to produce the same output
  • Example: Country A can produce 10 cars per hour while Country B can only produce 5
• Comparative advantage refers to a country's ability to produce goods or services at a lower opportunity cost
  • Opportunity cost measures the value of the next best alternative foregone
  • Example: Country X can produce either 100 bushels of wheat or 50 barrels of oil, while Country Y can produce either 80 bushels of wheat or 100 barrels of oil
• David Ricardo developed the theory of comparative advantage
  • Suggests countries should specialize in producing goods with the lowest opportunity cost
  • Leads to increased global production and consumption

Application in International Trade

• Comparative advantage demonstrates mutual benefits of trade even when one country has absolute advantage in all goods
  • Encourages specialization based on relative efficiency
  • Example: Although Country A produces both wheat and cloth more efficiently than Country B, it may still benefit from importing cloth from Country B if its comparative advantage in wheat is greater
• Specialization based on comparative advantage increases overall economic gains
  • Allows countries to focus on producing goods they are relatively better at making
  • Enables trading for goods that would be more costly to produce domestically
• These concepts explain patterns of international trade
  • Help predict which goods countries will export or import
  • Example: A country with abundant natural resources may specialize in raw materials exports, while a country with advanced technology may focus on high-tech manufacturing

Globalization: Benefits vs Challenges

Economic Impacts

• Globalization increases economic interdependence among nations
  • Expands international trade, investment, and cultural exchange
  • Creates interconnected global supply chains
• Benefits for developed countries include:
  • Access to cheaper goods and services
  • Expanded markets for their products
  • Increased economic growth through specialization
  • Example: U.S. companies accessing larger consumer markets in emerging economies (China, India)
• Challenges for developed countries involve:
  • Job losses in certain sectors due to outsourcing
  • Increased competition from emerging economies
  • Example: Manufacturing jobs moving from the United States to countries with lower labor costs (Mexico, Vietnam)
• Developing countries can benefit from:
  • Increased foreign direct investment
  • Technology transfer from more advanced economies
  • Improved access to global markets for their goods and services
  • Example: Chinese companies learning advanced manufacturing techniques from joint ventures with Western firms
• Challenges for developing countries include:
  • Potential exploitation of labor (sweatshops)
  • Environmental degradation from rapid industrialization
  • Vulnerability to global economic fluctuations
  • Example: Southeast Asian economies severely impacted by the 1997 Asian Financial Crisis

Sociocultural Consequences

• Globalization can lead to cultural homogenization
  • Seen as a benefit in terms of shared global culture
  • Challenge to preserving local traditions and identities
  • Example: Spread of American pop culture and English language globally
• Uneven distribution of globalization's benefits and costs
  • Exacerbates income inequality within and between countries
  • Creates significant social and economic challenges
  • Example: Widening wealth gap between urban and rural areas in rapidly developing countries (China)

Trade Agreements: Impact on Relations

Types and Functions of Trade Agreements

• Trade agreements reduce or eliminate trade barriers between participating countries
  • Promote free trade and economic integration
  • Can be bilateral, regional, or multilateral
• Regional trade agreements create preferential trading blocs
  • Facilitate trade within the bloc
  • May divert trade from non-member countries
  • Examples: USMCA (formerly NAFTA), European Union, ASEAN
• World Trade Organization (WTO) negotiates global trade rules
  • Provides a forum for resolving disputes between member countries
  • Aims to reduce trade barriers on a global scale

Trade Barriers and Their Effects

• Tariffs are taxes imposed on imported goods
  • Protect domestic industries from foreign competition
  • Increase prices for consumers
  • Can lead to retaliatory measures from other countries
  • Example: U.S. tariffs on Chinese goods leading to reciprocal tariffs on U.S. exports
• Non-tariff barriers significantly impact trade flows
  • Include quotas, subsidies, and regulations
  • Often become focal points in trade negotiations
  • Example: Agricultural subsidies in developed countries disadvantaging farmers in developing nations
• Removal of trade barriers through agreements can:
  • Stimulate economic growth and specialization
  • Lead to job displacement in certain sectors
  • Increase economic vulnerability in some industries
  • Example: NAFTA leading to growth in some U.S. sectors (services) but job losses in others (manufacturing)

Multinational Corporations: Shaping the Economy

Structure and Influence of MNCs

• Multinational corporations operate in multiple countries
  • Centralized management in home country
  • Operations or subsidiaries abroad
  • Example: Apple designing products in California but manufacturing in China
• MNCs contribute to the global economy through:
  • Foreign direct investment in host countries
  • Technology transfer to developing economies
  • Creation of global supply chains and production networks
  • Example: Toyota establishing manufacturing plants in various countries, bringing advanced production techniques
• Economic power of large MNCs can rival small nations
  • Gives them significant influence in international economic policy
  • Impacts decision-making at national and global levels
  • Example: Walmart's annual revenue exceeding the GDP of many countries

Impacts on Host Countries and Global Culture

• MNCs stimulate economic growth in host countries by:
  • Creating jobs and increasing employment
  • Generating tax revenues for local governments
  • Fostering skill development and technology transfer
  • Example: Samsung's investments in Vietnam creating thousands of jobs and developing local tech skills
• Critics argue MNCs can:
  • Exploit labor in developing countries (low wages, poor working conditions)
  • Contribute to environmental degradation
  • Engage in tax avoidance strategies harming host economies
  • Example: Allegations of worker exploitation in electronics manufacturing plants in China
• MNCs influence global consumer culture
  • Lead to homogenization of consumer preferences across borders
  • Often referred to as "McDonaldization" or cultural imperialism
  • Example: Spread of American fast-food chains and coffee shops globally
• Drive innovation and research on a global scale
  • Concentrate intellectual property rights in developed countries
  • May limit access to new technologies in developing nations
  • Example: Pharmaceutical companies conducting global clinical trials but pricing new drugs out of reach for many developing countries