20.1 Trade Relations and Global Corporations

Interdependence of Core, Periphery, and Semi-Periphery

• The world is linked through complex economic systems in which free trade agreements invite participation from increasingly connected countries.

  • As a result, international trade has skyrocketed in the last century.

• Countries engage in trade when it is mutually beneficial.

  • The benefit to both trading partners is not always equal.

• Globalization is widening the gap between core and peripheral countries and income disparities are expanding.

• There are two factors that are the basis for trade and impact its benefits:

• Comparative advantage: The relative cost advantage a country or organization has to produce certain goods or services for trade

  • For example, if two countries can both produce two products, it may not make sense for both of them to produce these goods but rather for each to specialize in one and share with the other.

• Ideally, a country should produce and export a range of goods and not make everything themselves.

  • Countries must consider their available resources, technology, capital, and labor costs, however, which affect comparative advantage.

• Complementarity: The mutual trade relationship that exists between two places based on the supply of raw material and the demand for finished products or services

• There must be demand in one place and supply that matches it in another.

• Factors that affect complementarity include:

  • Variation in the distribution of resources,

  • The relationships between core and semi-/peripheral countries, in which the periphery supplies raw materials and the core supplies manufactured goods

  • The economic advantages of specializing in certain goods.

• Countries export goods they have an advantage producing in exchange for goods that would be less expensive to import than produce themself.

• New trade relationships are fueled by economic development.

  • Countries need raw materials for production, with core countries usually getting them from peripheral ones.

  • The result is an interdependence of countries as part of an interconnected global economy.

  • In many countries of the periphery, globalization leads to commodity dependence, in which the economy is reliant on the export of raw products.

• Some worry that commodity dependence negatively impacts a country’s economy and can lead to a fixed state of underdevelopment.

Neoliberal Policies

• Neoliberalism: Beliefs that favor free-market capitalism in which trade has no constraints from government

• Adherents belief that neoliberalism implemented everywhere will cause ubiquitous economic development, lessen tensions through common values, and spread democracy and human rights.

• Neoliberal policies encourage free markets and discourage political interference with economic systems.

• The interdependence of countries globally has led to neoliberal policies that free private enterprise from political involvement.

  • These policies are associated with deregulation and privatization.

• Some countries have privatized their utilities, transferring government control over energy to private companies.

• Free trade agreements are neoliberal policies that are restructuring the world into new, economics-based regions.

  • Groups of countries, referred to as trading blocs, agree to a common set of trading rules.

  • This encourages trade and reduces trade barriers between the grouped countries.

• Globalization and trade benefit the world economy by increasing efficiency and opening new markets.

  • This has contributed to unprecedented global economic growth, a decrease in worldwide poverty, higher standard of living, and brings technology, jobs, and ideas to new places.

• However, this does not mean that globalization is good for all people everywhere.

  • Globalization hurts economic development in countries with a high commodity dependence.

  • It contributes to income inequality.

  • Core countries receive more benefits than peripheral ones.

  • The flow of capital from the rich to poor has not occurred as much as neoliberalists anticipated.

• Countries with less-skilled workforces receive less benefits and may keep their competitive advantage in providing low-skilled labor.

• Additionally, the absence of environmental and labor standards contributes to pollution and the exploitation of workers.

Supranational Organizations

• Recall that supranationalism is when three or more countries come together to establish collective policies in response to an international challenge.

• Many supranational organizations have formed to address challenges with international trade and growing interdependence in the world economy.

• Some supranational organizations have been formed specifically to support neoliberal policies and foster greater globalization.

  • These trade networks facilitate free trade and open markets, and enhance the competitiveness of the region.

• Founded in 1995, the World Trade Organization (WTO) is a supranational organization with 164 member countries from around the world.

  • The goal of the WTO is to provide governments with a forum to negotiate trade agreements, settle disputes, and oversee trade rules.

  • Overall, the goal is to help trade flow as freely as possible.

  • WTO agreements are designed to remove obstacles to trade and to ensure that rules are transparent and predictable.

  • The WTO is just one of many supranational organizations with a focus on economics.

• Another worldwide supranational organization is the International Monetary Fund (IMF), an organization of 189 countries.

  • The primary mission is to ensure stability of the international monetary system that countries and their citizens use to conduct business.

  • Other goals include facilitating international trade, promoting sustainable economic growth, and reducing poverty.

• It is important to note that the WTO and IMF are controversial.

  • Proponents of free trade point out that these organizations are unnecessary and actually interfere with natural market forces.

  • In theory, members of the WTO are on equal terms, but the WTO actually offers special permissions and protections in certain situations, usually benefitting core countries.

  • The IMF has fallen under criticism for making loans for specific economic policies to be instated, but some argue this interferes with the autonomy of the borrowing country.

• Some supranational organizations are focused on one industry or commodity.

  • Most influential of these is likely the Organization of the Petroleum Exporting Countries, or OPEC.

Deindustrialization

• Deindustrialization: Process by which a country or area reduces industrial activity, particularly in heavy industry and manufacturing

  • Core countries with aging infrastructure could not compete with newly emerging industrial states, which resulted in this process.

• This is the change that occurs with the decline of workers in the secondary sector and a reduction in industrial capacity.

• As discussed in Chapter 15, the eventual result is post-industrial regions in which the service industry becomes more important than manufacturing.

  • Deindustrialization has led to more tertiary service-sector jobs with generally lower salaries and fewer benefits in core countries.

• It has also increased the interdependence between core countries and semi-/peripheral countries by creating global supply chains.

• Like industrialization, deindustrialization has ripple effects that can have long-term and often unintended consequences.

  • Deindustrialization leads to the loss of jobs in the industrial sector and contributes to rising unemployment rates.

  • When a plant closes, businesses across the community suffer.

Government Trade Policies

• The public and private sectors both play critical roles in national, regional, and local economies.

• Private-sector organizations, corporations and businesses, are the drivers of economic growth.

  • They determine where they will locate and establish business relationships with suppliers and customers.

  • They also operate within the parameters established by government.

• Governments make laws to ensure that the economy is stable, and, ideally, that all players within it are treated fairly.

  • They also regulate the banking industry and monetary policies to provide businesses with an environment conducive to business.

• Governments at all scales implement policies to spur economic development.

• Businesses often locate where similar businesses are to take advantage of economies of scale in the workforce.

  • Recall agglomeration and how it affects the spatial distribution of businesses.

• Governments also try to develop growth poles.

• Growth pole: A place of economic activity clustered around one or more high-growth industries that stimulate economic gain by capitalizing on some special asset

• Highly innovative and technically advanced industries stimulate opportunities for economic development in related businesses.

  • These businesses include suppliers, as well as those fulfilling the needs of employees in the area, like restaurants or banks.

• State and local governments also may seek to attract new business by lowering corporate taxes, offering special tax incentives, or cash grants.

• Governments can also provide workforce training programs, particularly if the economy is in transition from one type of industry to another.

• They may also seek to provide political and economic stability, reliable infrastructure, transportation, and communication networks.

• National governments encourage economic development through the use of tariffs.

  • The goal of tariffs is to give domestic businesses an advantage by taxing foreign competitors’ imported products and making them more expensive.

  • Tariffs can protect a country’s industries, but they can also negatively affect an economy.

  • Tariffs limit free trade and reduce competition, which usually results in higher prices for consumers.

  • Quality and innovation also may suffer when there is less competition in the market.

• Imposing tariffs can prompt other countries to respond with their own tariffs, creating a trade war, which affects the economies of all involved.

• Free trade agreements among governments eliminate tariffs and often boost trade between the countries involved.

  • Peripheral countries gain manufacturing jobs and core countries gain access to low-cost labor.

20.2 Connected Economies

Impacts of the Global Economy

• Businesses in market economies naturally seek cheaper ways to do things.

• Labor tends to be far less expensive in countries in the periphery than in core countries.

• In the 1970s, U.S. and European corporations increasingly outsourced their manufacturing processes to take advantage of cheap labor in other countries.

  • Some companies built facilities abroad, while others looked for existing suppliers to integrate into their production process.

  • Offices were built around the world to oversee and facilitate the increasingly complex supply chain and to extend reach to new markets.

• This was followed by the globalization of banking and financial services.

  • By the 1990s, global companies provided business services throughout the world, facilitating the global flow of money, goods and services, and information.

• National and regional economies became increasingly interconnected and were influenced by global forces more than ever.

• Today, the widening economic gap between core and peripheral countries is evident when comparing global incomes.

  • According to the World Bank, the gross national income (GNI) per capita for the United States in 2018 was more than $62,000.

  • For Bangladesh, the GNI was $1,750 for the same year.

  • The imbalanced distribution of wealth across the globe impacts development.

  • Peripheral countries lack the funds for development, so investors from the core provide support through investment and loans.

• Multinational corporations that operate in countries other than the ones in which they were founded are large sources of funds for semi-/peripheral countries.

  • The facilities that these companies build in the semi-/periphery increase the local productive capacity.

  • The influx of capital can also help the economy develop by offering employment, diversifying, and investing in infrastructure.

• Financial institutions have also contributed to an increasingly interrelated global economic system.

  • The banking industry has brought new funding to businesses operating in the semi-/periphery.

  • This support has increased the number of businesses in new parts of the world.

  • These businesses and startups in turn help the global economy as a whole.

• The IMF and World Bank also foster economic development through a number of activities.

Changes in the Economic Landscape

• The contemporary economic landscape has been transformed by many factors.

  • Just-in-time delivery: A system in which goods are delivered as needed so that companies keep in inventory only what is needed for near-term production

• Entire systems are devoted to determining how to efficiently transport supplies and products to and from factories and stores.

  • This enables companies to be located farther from raw materials, fueling growth and lowering labor costs.

• Changes in industry have helped to fuel global interconnectedness.

  • Before the 18th and 19th centuries, goods were produced in people’s homes.

  • The Industrial Revolution changed this, with factories and the assembly line.

  • Each event has been another step toward greater interdependence among countries.

  • The ultimate goal of factories was to make products for mass consumption faster and more efficiently.

• Fordism: A highly organized and specialized system for industrial production that focuses on efficiency and productivity in mass production; named after Henry Ford

• Today, globalization and deindustrialization have changed the decision-making criteria for businesses and industries.

  • Recently, an increasing number of companies are turning away from mass production to focus on specialization.

• Post-Fordism: System focused on small-scale batch production for a specialized market and flexibility that allows for a quick response to changes in the market

  • Post-Fordist companies are either much smaller or contract work to smaller firms that oversee different parts of production.

    • This makes companies more capable of responding to changes in demand.

    • Often the bureaucracy of a single, large corporation can slow decision-making and hinder timely changes.

• Post-Fordism is made possible by advances in technology, which provides new tools that emphasize intellectualism over physical labor.

  • Post-Fordism has changed the manufacturing landscape in that it gives consumers more choice and allows companies to start small.

Outsourcing

• Advances in technology and communications have allowed companies more flexibility in the locations they choose.

  • As the service industry grows, many jobs are being performed in separate locations.

• Many corporations outsource aspects of production, turning the work to third-parties to cut costs.

  • Outsourcing can take place within a country or outside of it.

  • Offshore outsourcing: The process by which services or one or more aspects of production are moved to an organization in another country

• Communication in a company across physically distant locations is aided by a common language.

  • Even among organizations based in Europe or Japan, English ahs become the lingua franca for business.

  • As a result, English proficiency is an important criterion for companies deciding where to locate a new plant or outsource operation.

  • This puts some countries at significant advantage over others.

• Core countries have taken advantage of cheap labor sources by moving production facilities to newly industrialized countries (NICs).

  • This leads to a decline in traditional manufacturing jobs in core countries.

Division of Labor

• International division of labor: A pattern of production and labor in which different countries are engaged in distinct aspects of production

  • These were instituted through imperialism in the late 1800s by wealthy and powerful countries of the core.

• The result of colonial economies was a spatial pattern of production and labor based on geographic comparative advantage.

  • Specialization of production and labor continued after countries gained their political independence.

  • Less-skilled workers in the semi-/periphery produced raw materials for core countries who specialized in manufacturing by more-skilled labor.

• Since the 1970s, the international division of labor has evolved, as core countries began to deindustrialize.

  • Companies sought lower-wage labor locations for manufacturing and decentralized their operations.

• New regions and countries across the globe have developed new specializations.

• Financial services, transportation, and communication have also decentralized from core countries.

• More semi-/peripheral countries are becoming integrated in the global economic system as both producers and consumers, and incomes are rising.

  • It is important to note that these processes work both between and within countries.

• Spatially, today’s new international division of labor is represented by the North-South divide.

  • Countries of the Global North control four-fifths of the world’s income, with only one-quarter of the world population.

• One factor driving down wages in the Global South is competition to provide cheap labor.

  • As a result, many factory workers in NICs work long hours for little pay.

  • More than a billion people worldwide earn less than $2 per day working in factories.

  • Critics argue that people should be paid a fair wage regardless of where they live, but many multinational corporations pay more than local companies, which is marginally higher.

  • This means that multinational companies can give jobs and opportunities that local companies may not be able to offer.

• Multiplier effect: The economic effect in which a change creates a larger change, such as when a new manufacturing plant grows the economy by giving rise to more related jobs and services

• The economies of countries across the globe look very different from one another but are nonetheless interdependent.

New Manufacturing Zones

• In many countries outside the core, the growth of industry has resulted in the creation of new manufacturing zones.

  • These zones are established by many governments to attract foreign investment.

• Corporations are offered incentives to bring manufacturing jobs to the zone and in return the country gets economic stimulation.

Special Economic Zones

• Special economic zone (SEZ): An area within a country that offers more favorable economic regulations (such as tax benefits or no tariffs) to attract foreign businesses

  • This is one way for some countries to facilitate economic growth.

• Companies doing business in a SEZ usually receive tax incentives and are subject to lower or no tariffs.

• Governments tend to provide SEZs with more accessible and reliable infrastructure.

  • The goal of creating SEZs is to bring foreign business and investment to generate economic development.

• Their benefit is debated.

  • They have drawn criticism for their tendency to operate as isolated groups with few benefits reaching the country’s local suppliers.

• SEZs were initially used in industrialized countries, but since the 1980s, they have thrived in semi-/peripheral countries in East Asia and Latin America.

  • Countries in Central and Eastern Europe, Central Asia, Southwest Asia, and North Africa have also started implementing SEZs to compete for the growing interest in international production.

Export Processing Zones

• Export processing zone (EPZs): An area within a country that is subject to more favorable regulations (usually including the elimination of tariffs) to encourage foreign investment and the manufacturing of goods for export

• Governments have added other financial incentives to attract foreign investors and encourage economic growth.

  • EPZs have a narrower scope than SEZs and tend to be smaller.

  • EPZs also tend to be located where access to water or air transport is readily available.

• Tax breaks and exemptions are incentives for companies to conduct export-related business in EPZs.

• Companies will not pay taxes on the machinery or resources that they import as long as the goods being made ore for export.

  • This regulation helps to eliminate competition between local manufacturers and EPZs.

Free Trade Zones

• Free trade zone (FTZs): A relatively large geographic area within a country in which businesses pay few or no tariffs on goods to encourage or facilitate its role in international trade

• The use of FTZs has increased as countries establish them along trade routes to provide duty-free areas for warehousing, storage, and transport.

  • While the goals of FTZs are similar to SEZs and EPZs, they tend to cover a larger geographic area.

• FTZs provide customs-related advantages and exemptions from tariffs and taxes.

  • This allows for faster turnarounds for ships, planes, and other means of transport.

  • This enables ports to function easier as points along the way of a greater transportation system.

• It is important not to confuse free trade zones with free trade areas.

  • A free trade area is the region specific to two or more countries that have agreed to reduce trade barriers.

  • A free trade zone is a special areas within a country where foreign companies can import and export, free from regular taxes and regulations.

20.3 Developing a Sustainable World

National Resources, Development, and Consumption

• However they’re used, natural resources contribute greatly to a country’s economic development.

• The depletion of natural resources, on the other hand, negatively impacts a country’s economy and future productivity.

• The extraction of nonrenewable resources like oil and coal also have severe environmental and social costs.

• Pollution, waste, and the loss of habitats are just some of the environmental consequences of development.

  • The construction of roads for the transport of extracted products often causes deforestation.

  • Extraction also opens new areas to agriculture, illegal logging, the poaching, all contributing to further degradation of the environment.

• Resource exploration and extraction also have social consequences, especially on indigenous communities.

  • Industries can displace these native people or disrupt traditional way of life.

  • They can also face health problems due to the toxic byproducts of extraction.

• Many believe that humans use more natural resources than the environment can sustain; unsurprisingly, the wealthiest countries are generally the largest consumers.

  • As concerns grow, countries, businesses, and other groups are seeking strategies to reduce the human footprint.

  • Technology is playing a significant role in efforts to conserve natural resources and ensure sustainable development.

• Due to a global economy, all countries are dependent on one another for natural resources and manufacturing.

• This means natural resource protection is becoming increasingly global in nature, but the burden of sustainability is not equitable.

  • Peripheral countries involved in resource extraction are more greatly impacted by negative environmental effects and social inequities.

  • Core countries can better afford to undertake conservation efforts and human rights protections.

Sustainable Development Goals

• Sustainable practices are key to future development in order to maintain supplies of raw materials required by the economies of every country.

• Governments have adopted sustainable development policies that attempt to remedy problems stemming from natural-resource depletion.

  • These policies aim to conserve resources and reduce environmental degradation.

• Sustainability policies also seek to minimize negative impacts of development while still serving the needs of current communities.

  • Renewable energy targets are often the first step.

• In today’s global environment, laws passed by one country do not ensure sustainability.

  • The public and private sectors are working together to drive sustainability from a local or regional scale to a global scale.

  • Cities can and have set their own goals for sustainability.

• The UN’s Sustainable Development Goals (SDGs) help measure progress in development.

  • The UN focuses on small-scale financing projects for people’s basic needs.

  • The implementation of SDGs varies considerably across regions and within countries.

Ecotourism

• Ecotourism: A form of tourism based on the enjoyment of natural areas that minimizes the impact to the environment

• The goal of ecotourism is to enable a country, often in the semi-/periphery, threatened by industrial depletion to gain revenue through tourism with minimal environmental impact.

• Ecotourism involves travel to natural areas in ways that protect the environment and sustain the well-being of local inhabitants.

• Tourism overall is an important source of income for many countries and regions, but it can come at the expense of the environment.

  • According to the journal Nature Climate Change, travel and tourism are responsible for 8 percent of total carbon emissions globally.

  • Ironically, climate change threatens the pristine and unique features that draw tourists in the first place.

  • Large numbers of tourists walking through an area can also physically damage the plant life and landscape.

• Ecotourism is designed to provide a sustainable travel alternative that lessens negative impacts on the environment.

  • Countries engaged in the practice advertise unique travel experiences and enforce regulations to ensure sustainability.

  • Ecolodging incorporates alternative energy sources to further limit the tourist’s impact while on their trip.

  • Governments often use the revenues gained from ecotourism to fund conservation or preservation efforts.

• Ecotourism often has an educational component, as well.

  • It enables tourists to learn hands-on about fragile natural environments without having a negative impact on them.

  • People can also learn about the indigenous people of the land and their way of life.

• Luckily, ecotourism is available around the world.

• Ecotourism also enhances the tourist’s experience and can encourage entrepreneurship or local involvement.

  • Tourists feel more connected with the region and aware of its environmental and social issues.

• There are, of course, concerns with ecotourism.

  • High numbers of visitors may still harm the environment, despite best efforts.

  • Countries can also become too dependent on tourism, leading to disaster if visiting rates suddenly plummet.

• However, by empowering local communities with a source of income, ecotourism can help reduce poverty.

  • As people move to work in ecotourism, it means less people are engaged in other unsustainable or illegal activities.

• Ecotourism is one important way that countries are working together to achieve sustainability goals.