North American Free-Trade Agreement

Globalisation reduces poverty, but not everywhere. Since 1980 there has been unprecedented global integration. This is the third wave which we have experienced. The first wave of modern globalisation took place from 1870 to 1914. Advances in transportation and reductions in barriers to trade opened up the possibility for some countries to use their abundant land more productively. Flows of goods, capital and labour increased dramatically. Exports relative to world income nearly doubled to about 8%. Sixty million people migrated from Europe to North America and other parts of the new world.

The total labour flows during the first wave of globalisation were nearly 10% of the world's population. Global income per capita rose at an unprecedented rate but not fast enough to prevent the number of poor people from rising. The result was a widening gap between the globalisers and those left behind, leading to increased world inequality. However, incompetent economic policies, unemployment and nationalism resulted in the period spanning the First World War, the Great Depression and the Second World War being a giant step backwards in global economic integration.

By 1948, trade as a share of income was approximately back to its level of 18701. The years from 1950 to 1980 saw the second wave of globalisation which focused on integration among rich countries. Countries such as Europe, North America and Japan concentrated on restoring trade relations through a series of trade liberalisations under the General Agreement on Tariffs and Trade (GATT). During this second wave most developing countries remained stuck in primary commodity exporting and were largely isolated from capital flows, partly due to their own inward-orientated policies.

As a group the Organisation of Economic Co-operation and Development (OECD) economies surged ahead with unprecedented growth rates. However, globalisation is not and will never be an inevitable process. The first wave of globalisation, between from 1870 to 1914, was reversed by a retreat into nationalism – transport costs continued to fall but trade barriers rose. By the First World War trade had collapsed back to its 1870 level. After 1945, as trade barriers came down, and trade revived – the second wave of globalisation. This lasted until 1980.

Since then, there has been unprecedented global economic integration. Globalisation has happened before, but not like this. What had been many separate national economies started to integrate; the world's economies globalised. Many developing countries – the "new globalisers" – broke into world markets for manufactured goods and services. There has since been a dramatic rise in the share of manufactured goods in the exports of developing countries, from about 25% in 1980 to over 80% today. There has also been a substantial increase in FDI.

This marks an important change, as low-income countries are now competing head-on with high-income countries while previously they specialised in primary commodities. During this new wave of global market integration, world trade has grown massively. The world is more integrated than ever before. OPPORTUNITIES AND RISKS OF GLOBALISATION The word globalisation is used in many different ways. One definition states that it is the growing interdependence and interconnectedness of the modern world. The increased ease of movement of goods, services, capital, people and information across borders is rapidly creating a single global economy.

The process is driven by technological advances and reductions in the costs of international transactions and transportation. If managed wisely, the wealth created by globalisation created the opportunity to lift millions of the world's poor out of poverty. Managed badly, it could lead to increasing marginalisation of world economies. Which outcome results depends on the policies adopted by national governments, international institutions as well as society itself. To its fiercest critics, globalisation, the march of international capitalism, is a force for oppression, exploitation and injustice.

The rage that drove the terrorists to committing their obscene crime was in part, it is argued, a response to that. At the very least, it is suggested, terrorism thrives on poverty – and international capitalism, the protesters say, thrives on poverty too. Globalisation marks an era of rapid change, bringing with it great uncertainty across the world. It has raised legitimate concerns about the impact of globalisation on people's culture, environment, inequality and the Third World. Countries can be divided into those that are "more globalised" and those that are "less globalised".

As seen from the chart opposite2, poor countries that are 'more globalised' have experienced growth rates of around 5%. Rich countries are currently experiencing, on average, growth rates of around 2%. However, at the bottom of the table, 'less globalised poor countries' economies are actually experiencing contraction rates of around 1%. Countries can benefit, if they embrace globalisation. Throughout human history exposure to external influences has tended to enrich, rather than drain, individuals and societies.

Globalisation has accelerated this process and signs of an emerging global culture can be seen. Globalisation results in the exploitation of millions of workers in countries that do not give workers' rights to organise. For example, a woman who sews a $200 Liz Claiborne jacket sewn in El Salvador is paid just 74 cents – less than half of 1% of the jacket's retail value. In the US, the labour cost to sew a garment is typically 10% of the retail price. Free trade and foreign direct investment displaces workers in the industrialised countries by giving their jobs to workers in poorer countries.

Pay and conditions in developing countries are likely to be worse than in the rich country counterparts, but the newly employed poor country workers are clearly better off than working for a local firm or not working at all. Workers in poor countries may have to work 12 hours a day, 7 days a week with few protections for health and safety. Such incidents were highlighted in the tragedy in Bhopal, India, where an explosion at a Western Electric plant seriously maimed many workers.

However, due to lax safety laws, Western Electric simply closed the plant, without having to pay any costs of the damage the explosion caused. In some countries, globalisation leads the exploitation of child, and prison labour. Goods produced in such countries under these conditions undermine those produced in richer nations. The result has been a call for 'fair trade', as opposed to 'free trade'. The law of comparative advantage and the arguments in favour of allowing trade to occur between nations is heavily important.

If there are gains to be reaped from specialisation in line with comparative advantage, then the reductions of tariffs may be one way of making nations better off. Another way is the improved mobility of physical and financial capital which may enable comparative advantage to be taken even further. A multi-national corporation may be able to fragment its production to take advantage of market conditions on a worldwide basis. For example, it may be able to locate the labour-intensive part of its production process in countries with a relative abundance of labour in order to minimise costs on a global scale.

At the heart of the case for globalisation is the argument that there are economies of scale to be reaped by expanding production that would not necessarily be available to it if it were confined to a domestic market. Businesses with a global presence are likely to enjoy a larger scale of operations, thereby allowing them to spread costs over a larger volume of output. This allows businesses to exercise power over suppliers and unit output costs can be reduced. Global hotel chains such as Holiday Inn and Marriott are in a position to benefit from volume discounts from catering supply companies.

The growth in trade between nations has contributed to lifting 3 billion people out of poverty over the past 50 years. Reducing tariff barriers, which makes it easier for nations to trade with each other, lifts the wealth of all nations by allowing them to concentrate on those where they have greatest expertise. It is true that there has been some contraction in employment in labour intensive industries such has textiles and footwear in rich countries over the past 20 years, as production has moved to countries in which labour is cheaper.

For instance, with the North American Free-Trade Agreement (NAFTA), there is nothing to stop an American manufacturer closing an old factory in the United States and opening a new one in Mexico, where wage costs are more than halved. However this is part of the process of development. It would be even more harmful to less developed countries to ban or restrict their ability to compete in industries like textiles in rich markets. The impact of globalisation on many larger businesses has been to dramatically increase the level of competition which they face.

There are a number of reasons for this. Foreign competition has increasingly entered markets previously served mainly or exclusively by domestic businesses. Deregulation has meant that many businesses, which previously had little or no competition, are now opened up to the forces of global competition. Globalisation has provided opportunities for new, innovative businesses to enter markets and compete with all businesses, including well-established industry leaders. Businesses with a global presence can choose the most advantageous location for each of its operations.

When locating it operations, a business may consider reduction of costs and the enhancement of the business's performance. Production and service facilities are located in parts of the world which are likely to improve factors such as product or service quality. One of the greatest risk of globalisation is that whilst those that are part of it benefit greatly, there are a great many other who are simply left behind as they do not have the knowledge nor the resources to achieve it. This has resulted in inequality through out the world and increasing marginalisation of the poor.