San Jose Community College

San Jose Malilipot Albay

The Contemporary World

The Global Economy

The global economy is innately tied to trade; it allows countries around the world to obtain any
resource they may want, whether or not it is produced on the home front. This availability of resources
is facilitated through trade. The global economy allows us to eat the foods we want all year round
and buy clothing and gadgets at lower prices. During times of peace, it is beneficial in a global
economy, to see other nations succeed. On the other hand, during times of unrest, dependence on
outside nations, in a global economy, may seem scary. Due to globalization and other factors, it
is impossible for large industrialized nations to exit the global economy without devastating effects.

Economic Globalization and Global Trade

In general, economic globalization broadly refers to the increasing integration of national
economies around the world, particularly through trade and financial flows. Economic globalization
involves trade in goods and services, capital flows and trade in assets (e.g., currency, stocks), the
transfer of technology and ideas, and international flows of labor or migration. There have been
several periods of economic globalization; some experts also contend there have been periods of
deglobalization—the slowdown or reverse of globalization.
What are global value chains and how do they relate to globalization?
Global value chains (GVCs) disaggregate production processes into discrete stages in various
locations around the globe to achieve efficient production, allowing companies to organize different
parts of their value chain strategically, such as locating in a target customer’s home market or a
competitor’s base. Since the 1990s, powered by trade liberalization through free trade agreements
(FTAs) and the creation of the World Trade Organization (WTO) and advances in services and
technology, companies have increasingly structured international trade around global value chains.
More than two-thirds of world trade occurs via GVCs each year, representing a shift in how trade and
commerce are conducted as trade in intermediate goods and services exceeds that of commodities and
finished goods. This shift makes it increasingly difficult to understand and interpret the implications of
trade data trends for the U.S. economy as conventional trade data do not attribute any portion of the
traded value of finished manufactured and agricultural products to intermediate goods or services.
Despite the growing presence of GVCs in the global economy, recent events have highlighted the
potential risks and vulnerabilities of GVCs, particularly those concentrated in a particular region or
reliant on a single supplier. Worldwide natural disasters, emergencies, and other policy-driven
circumstances, such as the Coronavirus Disease 2019 (COVID-19) pandemic, have shown that GVC
links integrate and create interdependence between economies, which can leave companies vulnerable
to external shocks, including interruptions in other countries. At the same time, inter- dependence can
create broader economic growth and strengthened relationships among nations.
Although using GVCs can offer significant benefits, doing so can create additional costs and raise
risks. To mitigate risks and vulnerabilities, companies may (1) rethink their business models and seek
to build in redundancies for resilience, (2) focus more on shorter local or regional value chains, and/or
(3) utilize emerging technologies to lower and diversify risks and costs. These shifts will likely vary
across industry sectors, depending in part on the location and availability of suppliers and customers,
as well as U.S. and foreign trade and investment policies.
What is the relationship between trade and foreign direct investment?
Trade and investment flows are complements, and foreign direct investment (FDI) is considered to be
a major driver of trade. FDI is a type of cross-border capital flow, which takes place when a resident of
one country (including a company) obtains a lasting interest in—and a degree of influence over—the
management of a business enterprise in another country. FDI has supported the development of global
value chains by multinational corporations (MNCs), which source production globally. As a result, the
majority of trade takes place within MNCs that send components to and from locations at home and
abroad to transform into final products. FDI has thus supported the significant expansion of inter- and
intra-firm trade, which represents trade between parent companies and their foreign affiliates, and
trade between affiliates of foreign firms and the foreign parent company (see “Link Between
International Investment and Trade”).
A predominant reason U.S. firms make investments abroad is to sell goods and services to foreign
markets. Many firms want to maintain operations close to their customers to gauge preferences and
tastes that may differ from U.S. consumers (e.g., SUVs preferred in the United States versus small cars
in Japan). According to the latest data on activities of U.S. multinationals, in 2018, 12% of the sales of
U.S. foreign affiliates went to U.S. parent companies, while 58% of sales went to the local market of
the host country and 30% went to other foreign countries. However, some firms may also establish
operations abroad to replace exports or production, or to gain access to raw materials or less expensive
labor abroad. Foreign firms may invest in the United States to access the U.S. consumer market, high-
skilled labor, and other resources.
How does globalization affect jobs?
Greater global integration through trade and investment flows, combined with specialization in certain
stages of production, can disrupt markets. This disruption may create concerns about “offshoring” or
“outsourcing,” the shift of manufacturing and business functions to countries with lower labor costs.
For example, some U.S. multinational corporations (MNCs) focus on high-end activities associated
with innovating products in the United States, such as research and development (R&D), while
outsourcing production of components and final product assembly to suppliers and locations abroad.
Although most economists maintain that globalization and trade liberalization are unlikely to affect the
overall U.S. employment rate, greater volatility of U.S. worker incomes and employment in some
sectors are possible effects. For example, the shifting of manufacturing assembly abroad may reduce
the number of U.S. manufacturing jobs in some industries but boost the number of service-related jobs
in others.
Another issue is the impact of globalization on wealth distribution; for example, through dampening
wages for U.S. lower-skilled workers facing greater foreign competition compared to higher-skilled
workers, or through higher returns to capital over labor. In one study, the OECD concluded that “in
advanced economies, at least 10% of the decline of the labour share [in total national income] is
accounted for by increasing globalisation—and in particular by the pressures from the delocalisation
of some parts of the production chain as well as from import competition from firms producing in
countries with low labour cost.” A range of studies suggests that within the United States,
globalization has contributed marginally to rising U.S. wage inequality at a factor ranging from 10% to
20%.
Process Questions:
1. Do you think that the Philippines is harmed as other countries transfer their activities to us
through outsourcing?
2. In what ways do international organizations help our country’s economy?
3. Does the position of rich countries as giants in the economic chain threaten the status of less
developed countries in the global market?
Activity:
The products that we consume and use-foods, clothing, and gadgets-are part of our way of life.
Globalization allows for a worldwide exchange of these commodities and exposure to different
cultures as well. This activity will allow the student to investigate the origin and spread of the products
and services sold in our country. They will also be able to know the countries involved in the
production, distribution, and consumption of the products being sold consumed in the country. The
following are the steps to accomplish this activity:
1. Divide the class into seven groups. Each group will be assigned to any one of the following
products being sold in the Philippines. The group shall choose a specific foreign brand of the
product assigned to them.
a. Coffee
b. Sports car
c. Laptop
d. Hamburger
e. Wristwatch
f. Shoes
2. List down the main ingredients or raw materials in manufacturing the chosen product. Identify
the corresponding country from which each ingredient or raw material came from.
3. Identify the countries involved in the manufacturing of the chosen product. Indicate the
corresponding service the country does for the product. (e.g., Costa Rica- planting of coffee
beans).
4. Aside from the Philippines, list other countries in which the product is being sold.
5. Cite the kinds of technology that made the creation of the product possible. Consider
communications and transportation.
6. Write one to the three statements about the creation of the product. Share your statement with
your groupmates and indicate whether you agree or disagree with their statements.