Global Economic Overview

Chapter Coverage Globalization- Impacting International trading environment- policy aspects; International economic institutions and agreements GATT, WTO, UNCTAD, IMF, World Bank, MFA, ATC;

Globalization
Globalization is the process of social, political, economic, cultural, and technological integration among countries around the world. However, trade and business is the key aspect of globalization.
There are three important features or aspects of globalization, which can be seen as follows: 1. The increasing importance o f international trade 2. More and more multinational companies 3. More and more businesses thinking globally about their strategy.

Fashion, apparel & textiles is one of the most globalised sectors in the world.

Globalization and Business -Factors affecting globalization

There are many factors which have contributed to the growth of globalization, such as:
technological change, the reduction of transportation costs, the deregulation of business, the consumer taste changes, and the growth of new market and competition

Detailed explanation is seen in the next slide:

Globalization and Business -Factors affecting globalization

Factors which have contributed to globalization
Factors contributing to globalization
Explain how Globalization of markets and production result of lowering of trade barriers enabled by technological change Telecommunications and microprocessors The internet and the world-wide web Transportation technology Infrastructure development, and supply chain integration have brought down the transaction cost. More and more consumers today are willing to buy foreign or new products for fashion or new styles. New markets have been opened up in countries like former Eastern European countries and China. The growth of new markets has increased the trend of globalization. Average Tariff Rates on Manufactured Products have gone down More and more fierce competition has forced businesses to seek opportunities in the world markets. To compete successfully, businesses today must develop a global strategy.

Technological change

The reduction of transportation costs

Consumer taste change

The growth of new markets

Competition

Globalization and Business

-The effects of globalization on businesses
Globalization may have a great deal of influence on many businesses throughout the world. The impact may be stronger on some businesses, especially large businesses, but weaker on others. There are a number of effects of globalization on businesses. Some provide opportunities while others may provide threats to businesses. Some major effects of globalization on businesses are seen in the following table:

Globalization and Business -The effects of globalization on businesses

Effects of globalization on businesses
Effects of globalization on businesses Please try to explain how

Increasing competition Meeting consumer needs in more effective ways Being able to enjoy economies of scale

More and more foreign businesses have entered local markets so the competition has been intensified. Consumers have choices for products and services. They can buy the best products for the best prices. Businesses can enjoy as large scale of production in the whole world. Their production costs can thus be reduced. Businesses can choose the most favorable place for production or business operation. The production of Motorola company in China can reduce the production costs of labor and eliminate the tariff restrictions of exports. Businesses have more partners worldwide. They can join together to produce goods and services or to penetrate foreign markets.

Affecting the choice of location

Increasing mergers or jointdevelopment opportunities in the world market

Globalization- Impact on International Trading Environment

Globalization is the growing integration of the worlds economy. It is suggested that economic decision taken in one part of the world will affect other parts of the worlds so businesses need to base their business decision-making on what is happening in the world market rather than the national market.

Impact on Government
Positive effects
Increased economic development Expanded infrastructure Transfer of modern management techniques Greater interdependence among business partners

Negative effects
MNC power increased MNCs externalize cost to countries Competition results in too many concessions MNCs influence local policies Companies incorporate in low tax countries Pressure to reduce social benefits

Evidence of Globalization
World trade increased more than:
20x between 50 and 98 25x from 70 to 02

FDI annual flows increased more than:

10x from 84 to 98, or 50x between 75 and 00 Declined about 50% between 00 and 03

Globalization of Markets
Distinct/separate markets merging into a huge global marketplace
Mostly NOT consumer product markets Mostly industrial products Tastes and preferences of consumers converging (??)

MNCs creating global marketplace? MNCs more vulnerable to competition in their home markets

Global Institutions Emergence

Supra-national organizations define the rules of international economic activity:
World Trade Organization (succeeded GATT)

International Monetary Fund (IMF)

World Bank

United Nations (UNCTAD)

Globalization of Production
Each MNC
Sources particular goods and services from a set of locations it selects around the world Develops a global web of suppliers as a source of competitive advantage Decides where to produce depending on a countrys factors of production
Labor, land, capital, energy, expertise

Host governments have a stake in the successful establishment of an MNCs operations

Important International Institutions

General Agreement of Tariff and Trade (GATT) The World Trade Organisation (WTO) United Nations Conference on Trade and Development (UNCTAD) International Monetary Fund (IMF) World Bank (WB)

GATT

The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement regulating international trade. According to its preamble, its purpose is the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." It was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade Organization in 1995. The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.

GATT (1947..)
ITO (International Trade Organization) 1948 never came about (US opposition) GATT 1947 provisional agreement Tariff reduction + parts of ITO Broader aspects (UNCTAD-like not included 1947: 23 members

WTO

The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT). The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments.

WTO
Result of Uruguay Round 1986-1994 From 1.1.1995 Umbrella for three components:
GATT General Agreement on Tariffs and Trade GATS General Agreement on Trade in Services TRIPS Trade-Related Aspects of Intellectual Property Rights

Common system for Dispute Settlement Trade policy review mechanism Single undertaking: Most agreements binding

UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues. The organization's goals are to "maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis. The creation of the conference was based on concerns of developing countries over the international market, multi-national corporations, and great disparity between developed nations and developing nations. In the 1970s and 1980s, UNCTAD was closely associated with the idea of a New International Economic Order (NIEO). The United Nations Conference on Trade and Development was established in 1964 in order to provide a forum where the developing countries could discuss the problems relating to their economic development. UNCTAD grew from the view that existing institutions like GATT, the International Monetary Fund (IMF), and World Bank were not properly organized to handle the particular problems of developing countries.

UNCTAD
The primary objective of the UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology. The Conference ordinarily meets once in four years. The first conference took place in Geneva in 1964, and the second in New Delhi in 1968. One of the principal achievements of UNCTAD has been to conceive and implement the Generalised System of Preferences (GSP). It was argued in UNCTAD, that in order to promote exports of manufactured goods from developing countries, it would be necessary to offer special tariff concessions to such exports. Accepting this argument, the developed countries formulated the GSP Scheme under which manufacturers' exports and some agricultural goods from the developing countries enter duty-free or at reduced rates in the developed countries. Since imports of such items from other developed countries are subject to the normal rates of duties, imports of the same items from developing countries would enjoy a competitive advantage. Currently, UNCTAD has 194 member States and is headquartered in Geneva, Switzerland.

IMF
The International Monetary Fund (IMF) is an international organization that was created on July 22, 1944 at the Bretton Woods Conference and came into existence on December 27, 1945 when 29 countries signed the Articles of Agreement. It originally had 45 members. The IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the worlds international payment system post-World War II. Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds on a temporary basis. Through this activity and others such as surveillance of its members' economies and policies, the IMF works to improve the economies of its member countries. The IMF describes itself as an organization of 188 countries (as of April 2012), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. The organization's stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs. Its headquarters are in Washington, D.C.

WB
The World Bank, established in 1946 is an international financial institution that provides loans to developing countries for capital programs. The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a commitment to promote foreign investment, international trade, and facilitate capital investment. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter incorporates these two in addition to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID).

MFA
The Multi Fibre Arrangement (MFA) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005. The MFA was introduced in 1974 as a short-term measure intended to allow developed countries to adjust to imports from the developing world. Developing countries have a natural advantage in textile production because it is labor intensive and they have low labor costs. At the General Agreement on Tariffs and Trade (GATT) Uruguay Round, it was decided to bring the textile trade under the jurisdiction of the World Trade Organization. The Agreement on Textiles and Clothing provided for the gradual dismantling of the quotas that existed under the MFA. This process was completed on 1 January 2005. However, large tariffs remain in place on many textile products.

ATC
For decades, international trade in textiles was subject to discriminatory quantitative restrictions put in place to protect domestic textile industries, particularly in the US, EU, Canada, and Norway. Under the WTO, these quotas fell under the auspices of the Multi-Fibre Arrangement (MFA). While some nations with strong political ties to developed countries benefited from preference agreements that raised their quota levels or eliminated them, many developing countries suffered from severely restricted market access. During the Uruguay Round WTO Members signed the Agreement on Textiles and Clothing (ATC) [2], effective in 1995, that established multilateral rules and subjected the textiles trade to the basic WTO principles of nondiscrimination and national treatment. The agreement mandates that WTO members implement the ATC over a period of 10 years, from January 1, 1995 to January 1, 2005.

 The Agreement on Textiles and Clothing required the progressive elimination of all quantitative restrictions according to four stages. Members were required to bring no less than 16% of the products in question into conformity with multilateral trade rules, followed by an additional 17% by 1998 and another 18% by 2002. At this point, 51% of products will have had their quantitative restrictions eliminated. By 2005, members must bring the remaining 49% of their textiles trade policy into full conformity with the Agreement, at which point the textiles sector will be fully integrated into the multilateral trading system. The total quota elimination completed in 2005 as per the agreement. To this end the Agreement sets out procedures for integrating the trade in textiles and clothing fully into the GATT system by requiring countries to remove the restrictions in four stages over a period of 10 years ending on 1 January 2005. The flexibility available under the integration procedures has, however, enabled countries to remove restrictions in the first two stages only on a limited number of products.

ATC
The basic aim of the Agreement on Textiles and Clothing (ATC) is to secure the removal of restrictions currently applied by some developed countries to imports of textiles and clothing. To this end the Agreement sets out procedures for integrating the trade in textiles and clothing fully into the GATT system by requiring countries to remove the restrictions in four stages over a period of 10 years ending on 1 January 2005. The flexibility available under the integration procedures has, however, enabled countries to remove restrictions in the first two stages only on a limited number of products. The first major impact of the integration programme is therefore expected when the third-stage integration takes place (on 1 January 2002); the bulk of the restrictions will be withdrawn in the last phase, when the transition period ends and the Agreement expires.