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Global Economy

International trade permits countries to specialize in eral leading trading nations created the General Agree-
the resources they have. Countries benefit by producing ment on Tariffs and Trade to serve as a forum for bringing
goods and services they can provide most cheaply and by down trade barriers. Between 1947 and 1994, trading
buying the goods and services other countries can provide countries around the world participated in eight rounds of
most cheaply. International trade makes it possible for negotiating in an effort to reduce tariffs.
more goods to be produced and for more human wants to Another agreement, the North American Free Trade
be satisfied than if every country tries by itself to produce Agreement, was implemented by Canada, Mexico, and
everything it needs.
the United States in 1994. This agreement reduced tariffs
over a fifteen-year period, lifted many investment restric-
U.S. FOREIGN TRADE tions, allowed for easier movement of white-collar work-
The United States is one of the world’s leading trading ers, opened up government procurement over a ten-year
nations. The exports and imports of the United States period, and created a mechanism for dispute resolution.
thrive so mightily that the profits of many large busi- As a result, retailers such as Wal-Mart and 7-Eleven have
nesses, the jobs and incomes of many workers, and the expanded operations into Mexico and many Mexican and
incomes of many farmers are dependent upon them. Canadian firms have been enjoying the benefits of partic-
In such a market, companies may source from the ipating in the world’s largest consumer market, the United
United States, conduct research and development in States.
another country, take orders in a third country, and sell Multinational corporations search the globe for the
wherever there exists demand, regardless of the customer’s lowest possible labor costs and weakest environmental
nationality. safeguards. It is not unusual for them to get help from
undemocratic governments that compete in the global
CAUSES OF INCREASING marketplace by refusing to protect their citizens from
GLOBALIZATION environmental degradation and workplace abuse—rang-
ing from below-survival wages to physical attacks.
In the days of Scottish economist Adam Smith
(1723–1790), if a merchant wanted to trade a lot of wool
for a case of port wine, the communication of that intent OTHER FACTORS AFFECTING THE
would require weeks. Sending a message to someone in GLOBAL ECONOMY
India took months. Such circumstances lent themselves to Closely related to the liberalization of trade, technological
fragmented and individualized markets run by family advantages, and the convergence of consumer preferences
members or close friends. These industry managers were are a set of competitive factors centered around the ideas
trusted to make decisions in the best interests of the com- of economies of scale (larger production volumes generat-
pany because no rapid means of communicating existed. ing lower per-unit production costs) and locational advan-
The opportunity to closely coordinate the act of several tages.
foreign operations simply did not exist.
Another factor affecting the global economy has been
In the early twenty-first century, communication the shifting of production among various plants located
between most parts of the world is instantaneous. A man-
outside of the United States. This has occurred most sig-
ager in Berlin, Germany, can phone or e-mail a manager
nificantly with the People’s Republic of China. China is
in Rio de Janeiro, Brazil, to discuss the latest news regard- able to produce a wide variety of goods and services at
ing the orange crop. These new capabilities allow vast much lower costs than is possible in the United States.
amounts of business data to be transferred globally almost
Overall, the future for the global economy is positive.
instantaneously at a reasonable cost. The world truly has
become a smaller place in terms of communication. Many challenges lie ahead, but the overall opportunity is
very exciting and carries with it many unknown adven-
Technological advances have increased the potential
tures in international trade in ways not yet known.
for the transportation of goods and individuals globally.
This reality encourages a global market approach to busi- SEE ALSO International Business; International Market-
ness as companies attempt to reach the largest number of ing; International Trade
consumers at the lowest possible prices.
Another factor leading to a more globalized market- BIBLIOGRAPHY
place is the historical decrease in tariff and nontariff bar- Adonis, A. (1994, September 17). Lines open for the global vil-
riers. In 1930 the United States raised tariffs under the lage. Financial Times, p. 8.
Hawley-Smoot Tariff Act. Other countries followed suit, Braithwaite, John, and Drahos, Peter (2000). Global business reg-
and international trade slowed considerably. In 1947 sev- ulation. New York: Cambridge University Press.

342 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION