What Is Globalization in Business Context - Assignment Example

International Business 1. In business context what is globalization? Discuss the key drivers associated with globalization? In business context, globalisation refers to a new strategy in economic policy, which alters the objectives of production such that the output is targeted to reach the international market under the terms of free competitive of quality, cost and prompt supply (Jalal, 2006, p. 1). The first era of globalisation, between 1870 and 1913, was characterised by a level of integration in goods and financial markets comparable to that which exists today. It also displayed a significant number of financial crises similar to those that have been witnessed since the 1970s (Bordo & Meissner, 2006, p. 1). Between the 1920s and the 1930s, many nations-states created formidable barriers to international trade as well as foreign direct investment. This after the post war crisis of 1920 and 1921 that saw the process of real raw materials decline by 45 percent. The global economic crisis of 1929 caused a major slide in the prices of raw materials, which prevailed until the end of the 1940s (Ocampo & Martín, 2003, p. 34-35). Economic globalisation as it is known today can be traced back to the decisions made at US and British initiated economic conference that was held in the final months of World War II. The 1944 conference was known as the United Nations Monetary and Financial Conference, or the Bretton Woods Conference as it is commonly known. The countries involved saw the need to come together and establish common rules for financial and commercial global transactions. It was believed that by doing this, they would be able to rebuild and regulate the international economy, and thus prevent the monetary chaos witnessed in the interwar periods from occurring again (Campbell, MacKinnon & Stevens, 2010, p. 11). The key drivers to globalisation since the Bretton Woods Conference include institutional drivers, technological change, and political issues. Various institutions have been formed such as the WTO, the IMF and the World Bank. WTO (starting as GATT) has been instrumental in ensuring that the level of barriers to international trade is reduced through various trade agreements. The IMF conducts surveillance and offers financial technical assistance for member states. This assistance is offered in the form of loans and credits to IMF members who have balance of payments problems and those that need to reform and adjust their trade policies (Snowdown, 2007, p. 30). Both IMF and the World Bank have also helped countries to liberalise their economies (Panford, 2001, p. 51). Technological change has also been a key factor in economic globalisation with the growth of the Internet which enables real time communication across the world. The Internet has also revolutionised the way transactions are done with the emergence of e-commerce. Transportation has also improved with the development of large ships, trucks and aircrafts which carry large volumes of cargo. Political issues also drive globalisation. This is because there are many trade agreements that are signed between two or more countries to boost international trade through the creation of free markets. Large trading blocs such as the EU, MERCOSUR, NAFTA, COMESA and so on have been formed as a result of political agreements between the respective members states. With trading blocs, more trade is achieved as a result of fewer barriers between countries and this drives globalisation. 2. What achievements came from the Bretton Wood Conference of 1944? Why did the Bretton Woods system collapse? What has replaced it? In 1944, delegates from 44 countries assembled in Bretton Woods, to negotiate a new world order that would govern exchange rates, foreign lending, and international trade to avoid the financial crises that had occurred in the preceding decades. Key achievements of the Bretton Woods conference include the establishment of Bretton Woods System of pegged but adjustable exchange rates, and the formation of a new system called the International Monetary fund (IMF) to supervise the operation of exchange rates (Bordo & Eichengreen, 1993, p. xi). The new open economic system would be characterised by lower tariffs, while the IMF was meant to reduce barriers to international trade which had been created during the interwar period (Campbell, MacKinnon & Stevens, 2010, p. 11). The pegged exchange system introduced by the Bretton Woods agreements was based on the free convertibility of the US dollar into gold. The US agreed to purchase or sell gold to maintain the $35 per ounce rate that had been established by President Franklin Roosevelt in 1933. The other signatory states which hardly had any gold, agreed to purchase and sell dollars so as to maintain their exchange rates at the levels agreed upon. This system succeeded in refixing exchange rates and restoring world trade. However, it also had some flaws. Changes in exchange rates were permitted only as a last resort, which essentially meant that the country had a chronic deficit in the balance of payments of significant proportions. Since devaluation was allowed only after a long run of balance of payments had depleted the country’s reserves, this devaluation could often be undetected and usually had to be large. It was thought that speculators could use this opportunity to make profit and attack weak currencies with massive selling (Baumol & Blinder, 2011, p. 387). The Bretton Woods exchange system collapsed in 1971 when, in an effort to counteract the forces that were destabilising the economic competitiveness of the US, President Nixon abandoned the gold standard (Campbell, MacKinnon & Stevens, 2010, p. 12). He suspended the official convertibility of the dollar into gold and cut the exchange rate system loose (Bordo & Eichengreen, 1993, p. xi). After the US decision to suspend convertibility of the dollar into gold ended the fixed exchange regime of Bretton Woods, the world was confronted with a problem of determining new monetary parties as well as their level of fluctuation. In December 1971, the Group of Ten met at the Smithsonian Institute in Washington and established new parties for the greatest world currencies. They also fixed at 2.25 percent the margins of fluctuation of exchange rates (above and below new central rates). Further, they decided to increase the price of gold to $38 per ounce and thus approved an 8.57 percent devaluation of the US currency. This agreement, known as the Smithsonian Agreement, was not successful in solving the problems associated with the increasing stability of the international monetary system caused by dollar inconvertibility, and was thus discarded after only 14 months (Cencini, 1995, p. 209). Another meeting was held in Jamaica in 1976, leading to the Jamaica Agreement. In addition to legalising the floating exchange rate system, it was decided that the IMF would have to oversee the exchange rate agreements, raise quotas of member states, and sell one-sixth of its gold reserves, thereby creating, through the receipts of this sale, a trust fund to help underdeveloped states (Cencini, 1995, p. 211). Today’s exchange rate system is a “nonsystem” or an eclectic mix fixed and floating exchange rates, with no major organising rule. Some states such as China still peg their currencies in the old Bretton Woods system. A few countries such as Ecuador, Zimbabwe and Panama have taken the more extreme step of using the US dollar as their domestic currencies. Other states tie their currencies to a hypothetical basket of various foreign currencies, instead of just one. However, many nations have let their exchange rates float, even though not freely. Such rates change slightly on a daily basis, and market forces determine the base trends, down or up. Nonetheless, governments usually intervene to moderate exchange rate movements whenever they deem it necessary (Baumol & Blinder, 2011, p. 390). 3. Discuss the use of regional trade agreements (free trade agreement) in the last decade or so. Why has their usage increased? In your answer address on specific agreement Regional trade agreements have increasingly taken on the role of removing barriers to trade as envisioned by the WTO. This role was initially played by the GATT. GATT was initiated by the Bretton Woods Conference as part of a comprehensive plan for economic revitalisation after the Second World War. The major purpose of GATT was to reduce barriers to international trade. This was to be achieved through cutbacks on tariff barriers, subsidies on trade, and quantitative restrictions through a series of agreements (Cherunilam, 2008, p. 625). GATT also aimed to incorporate developing countries into an open multilateral trading system. The purpose of GATT was attained through various conferences called Rounds, the last one under GATT being the Uruguay Round. The purpose of GATT was taken over by WTO when GATT was abolished and WTO was formed in 1995. GATT aimed to liberalise trade by promoting non-discrimination, prohibiting quantitative restrictions and enhancing consultations between signatories. Under non-discrimination, two principles of the most favoured nation (MFN) and national treatment are notable. MFN implies that any advantage granted by any contracting party to the products of any other country should be accorded immediately and unconditionally to the products of any other contracting party (Weiss, Denters & de Waart, 1998, p. 460). Under national treatment, it is required that once goods have entered a market, they must be accorded similar treatment as the equivalent domestically produced goods (Weiss, Denters & de Waart, 1998, p. 461). Although GATT/WTO proceedings through trade rounds have been largely successful, the Doha Round has not been completed because emerging issues such as new policy circumstances and multilateralism versus regionalism. The Doha Round talks are complicated because of the larger number of participants involved, their differing interests and their detailed agenda (Simon, 2008, p. 6). With regards to multilateralism versus regionalism, some regional trade agreement do not meet the WTO objective of liberalising trade since they only allow free trade between member states, yet almost all states belong to a trading bloc. These countries therefore hold different views in regard to the Doha Round as they also hold regionalism agenda. Regional trade agreements have been popular in the last decade or so because it is believed that regional and bilateral trade agreements may achieve quicker results compared with the multilateral agreements under the WTO system. They may also enable parties to achieve levels of liberalisation further than the multilateral agreements, and may be able to handle specific matters that may not be reflected in the multilateral menu (Pasadilla, 2006, p. 17). For instance, under the EU, trade barriers have come down considerably, and the member states are involved in other issues such as giving development aid to poor countries, country reforms and so forth. Further, according to Katzenstein (cited by Gabel), small European countries that are highly depended on trade gain economically and politically from expanding trade liberalisation with their trading partners under the EU. References Baumol, W. J. & Blinder, A. S. (2011). Macroeconomics: Principles & Policy (12th edition). New York: Cengage Learning. Bordo, M. D. & Eichengreen, B. J. (1993). A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Chicago: University of Chicago Press. Bordo, M. D. & Meissner, C. M. (2006). Foreign Capital and Economic Growth in the First Era of Globalization. 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