International Business Environment - Essay Example

INTRODUCTION Ever since the General Agreement on Trade and Tariffs (GATT) came into effect in the 90’s and the World Trade Organization was established with a mandate to regulate and intervene in the disputes arising out of globalization, the world economy has been integrated in a way that has surpassed the earlier attempts. Though the world was integrated in colonial times as well, the process received a setback in the 21st century in the intervening period between the two world wars. It was only after the establishment of the Bretton Woods system that the world economy started regaining some of its interconnectedness. And the demise of alternatives to capitalism and the free market system ensured that all countries with a desire to alleviate poverty and raise the standard of living of the peoples would invariably turn to trade and commerce and utilize the “theory of comparative advantage” as proposed by the noted economist David Ricardo. The focus of this paper is not so much on the process of globalization per se as much as the way in which it has been carried out. As I argue throughout this paper, free trade in reality has been quite different from what the theoretical basis talks about. This is mainly on account of the process being skewed in such a way that the US economy becomes the primary consumer and hence becomes the underpinning of the world economy. Of late, there has been talk of decoupling of the economies of the developing world and this has given rise to expectations of “soft landings” for counties like India and Russia. However, this has not been the case and it is in the interests of the so-called BRIC’s (Brazil, Russia, India & China) to ensure that they move in step with the US and ensure global economic stability. FREE TRADE IN THE REAL WORLD Successive rounds of the WTO trade negotiations have verged between collapse and last minute deals trying to salvage the rounds with developing countries ranged against the developed countries in an attempt to win more concessions. The theory of comparative advantage and the concept of a global economy have been touted as the alternative to closed economies and one that is suited for the modern world. However, this does not seem to have the desired consequences. While Free Trade would have been envisioned as a world without borders, what has been achieved is a world that is borderless only to the extent that the exchange of exported goods take place and internally the terrain has pretty much remained the same. And the other negative consequence of opening up of the economies has meant that financial liberalization has given way to “casino capitalism” and hence resulted in the global economic meltdown in 2007 and 2008. Apart from the argument about theory of comparative advantage, the other argument has been the success of the “export driven” model and failure of the “import substitution model” as a means of economic growth. As Kreuger (1998) points out, “growth spurred under an industrialization strategy that is based on Import substitution slows down over time, trade liberalization is thus associated with more rapid growth than the final phases of substitution of imports which precede it”. The notable successes of the trade liberalization and export oriented models of growth were the so-called “Tiger Economies” in South East Asia in the 1960’s and the phenomenal success of China in the late 20th century and the first decade of this century. The above paragraphs were about the successes of economies due to free trade and liberal economic policies. What has been left out from the discussion is the impact of protectionist policies domestically and liberal policies towards exports. Thus, the picture that we have is that China and the tiger economies have actually used a mix of promotion and protection as far as trade policies are concerned. And this is the “hidden danger” to the global economy and to the prospects of free trade. FAILURES AND BARRIERS TO FREE TRADE The attacks of 9/11 were a definite setback to the processes of globalizationi. In a sense, the world turned inwards after 9/11 with greater visa restrictions making it hard for easier movement of people around the world. Since this is a critical component of globalization, it was a throwback to the old days of protectionism. Also, there was a movement towards localization with countries in the immediate aftermath suspending many of the neo-liberal policies that they were pursuing till then. But recent evidence shows that the world has effectively surmounted some of the challenges thrown up by 9/11 and is picking up steam towards the processes of globalization. Apart from these barriers, as I have listed in the first section, there needs to be a corresponding liberalization of the institutions in the developing countries if the concept and notion of free trade leading to higher growth has to be achieved. Thus, a country can be never be fully integrated unless it undertakes comprehensive reform of its institutions as well. In this context, it is pertinent to note the successes of the Tiger economies in liberalizing their governance and bureaucratic framework whereas countries like China have lagged behind in overhauling their systems. This may be the most potent danger to the success of free trade in the future. The other aspect that we discuss in the next paragraph has to do with the export of free markets around the world without thought for how they would fit in to the political and social framework in those countries. This is a point that is brilliantly described in the book, The World on Fire, by Amy Chua. FUTURE OF WORLD TRADE The attacks of 9/11 were a definite setback to the processes of globalizationii. In a sense, the world turned inwards after 9/11 with greater visa restrictions making it hard for easier movement of people around the world. Since this is a critical component of globalization, it was a throwback to the old days of protectionism. Also, there was a movement towards localization with countries in the immediate aftermath suspending many of the neo-liberal policies that they were pursuing till then. But recent evidence shows that the world has effectively surmounted some of the challenges thrown up by 9/11 and is picking up steam towards the processes of globalization. Apart from these barriers, as I have listed in the first section, there needs to be a corresponding liberalization of the institutions in the developing countries if the concept and notion of free trade leading to higher growth has to be achieved. Thus, a country can be never be fully integrated unless it undertakes comprehensive reform of its institutions as well. In this context, it is pertinent to note the successes of the Tiger economies in liberalizing their governance and bureaucratic framework whereas countries like China have lagged behind in overhauling their systems. This may be the most potent danger to the success of free trade in the future. The other aspect that we discuss in the next paragraph has to do with the export of free markets around the world without thought for how they would fit in to the political and social framework in those countries. This is a point that is brilliantly described in the book, The World on Fire, by Amy Chua. As the case study on Mozambique shows (McMillan et al, 2003), “One theme has to do with the importance of credibility and the need for expectations management. That in turn requires creative thinking on credibility enhancing mechanisms as an integral part of reform. The second theme is that reform is a “political” problem as well as a “technical” one. Had the political opposition of the urban groups been anticipated, or factored in, compensatory mechanisms and side bargains could have been worked out beforehand. Third, policy reform via conditionality is rarely conducive to desirable outcomes”. CONCLUSION The outcry over globalization and free trade is bound to grow with the economy going into a deep recession. As we have seen in the preceding sections, this might lead to protectionist tendencies prevailing in the US. This would happen as the country may not be able to tolerate further losses on account of globalization. The other reason would be the increasing indebtedness of the US towards China that makes the cries for lesser globalization that much shriller. However, if the US has to ensure that it does not do away with globalization completely. As we have seen it can be a win-win situation provided the right conditions are in place. These include prudent trade policies and sound fiscal and monetary policies as well. The US economy cannot fall into the trap of high costs on account of processes that can be outsourced but are retained. On the other hand, it cannot cope with severe job losses as well. Thus, the need of the hour for the incoming administration would be for a well thought out strategy that takes into account all these factors and then considers policy responses. The bottom line should be that there cannot be a blind aversion to globalization and only when informed debate takes place and all options are considered, there would be meaningful progress on the economics of globalization. In conclusion, it is apparent that globalization, if it has to benefit the people at large has to take a bottom-up approach blended with policy guidance from the top. Without a fair measure of integration of the world markets with that of the native structures of production, there would be serious imbalances in the way in which trade is carried out. Rise in consumption alone does not suffice. It is by understanding the deep linkages between all the aspects of the production and consumption cycle that any meaningful progress can be achieved. The Chimerica (China and America) may well remember their ancient curse of “May you live in interesting times” and realize that they are now joined at the hip and hence have to tango together. Read More