Globalization is not a new phenomenon. It began during the age of exploration in the 15th and 16th centuries. However, globalization was redefined in the 1980s when the markets opened up. These days, the strong presence of free trade allows the free movement of goods, services and capital across borders.
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The market is a place of exchange where commercial activities take place. This is where sellers (the supply) who offer goods or services meet buyers (the demand) who want to pay money for these goods or services.
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Free trade is an economic policy that aims to eliminate all trade barriers between states that have signed an agreement.
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Globalization is a phenomenon that pushes states to open their national economy to the world market in order to increase trade between countries, making them interdependent. Trade may include services, goods, capital or the movement of workers.
Even if a company is located in a specific area, it can still offer its services all around the world. Airbnb and Uber have their headquarters in the United States, but they offer accommodation and transportation services around the globe. Canadian markets are no longer limited to Canadians, but can be accessed by foreign investors and consumers. The same applies to other countries. Three major changes have contributed to the opening of markets:
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In 1991, the Soviet Union (USSR) collapsed.
This marked the end of the Cold War, which had divided the world between the American capitalist system and the Soviet communist system. After the Cold War, the American capitalist system spread around the world, which greatly facilitated global trade. Most of the 15 new post-Soviet countries adopted capitalism.
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Economic agreements that were very advantageous were signed.
This led to the formation of large economic areas made up of several countries which eventually eliminated several trade barriers, such as customs duties (the amount paid for goods entering a country). Several countries signed economic agreements to facilitate the free movement of goods, services and sometimes labour. These agreements included the European Union, the North American Free Trade Agreement (NAFTA) and the Southern Common Market (Mercosur)
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Improved information and communication technologies (computers, Internet, etc.) facilitated better communication around the world.
In just a few seconds, two people living 15 000 km apart could communicate in real time. Improved transportation methods also facilitated global trade. A several-day journey by boat or car takes only a few hours by plane.
The end of the Cold War, the formation of large economic areas and improved technology contributed to the opening of markets and increased trade between countries. In the era of globalization, much of the world accepted the rules of the capitalist economic system. As a result, nearly all countries began to trade with each other. Globalization increased economic interdependence among countries.
The economies of several countries are linked and a single decision can trigger a series of chain reactions that could damage several economies. A country can either import (buy) or export (sell) a product (good or service). Exports bring money into the country. This means that to generate profits, a country must export more than it imports. When a country is in an economic crisis, it greatly reduces its imports, which causes countries that export to that country to lose money.
During the 2008 economic crisis, the United States reduced its imports, which greatly affected Canada and Mexico. About 75% of exports (sales) from Canada and Mexico went to the United States.
There can also be economic interdependence in the manufacture of goods that require several components.
A company that makes jeans will have to trade with Mali for cotton, with Germany for dye, with Japan for zippers, etc. So, the company becomes interdependent on the countries with which it does business. If they cannot get the components they need to make their product, they cannot sell it.
In short, the economic interdependence of countries means that a single decision can have huge impacts on other economies.
Globalization is like the whole world becoming one big country. This is because national borders are more open and international trade significantly increases. Instead of thinking of each country’s economy individually, we must now consider the planet as a whole.
Globalization has been accelerated by improved transportation and communication networks. Because of telecommunications, it is easier to move merchandise and people (including business travel and tourism) and share information around the world. Free trade agreements (FTA) also facilitate trade by getting rid of customs tariffs.
When companies plan their activities (sourcing raw materials, setting up production facilities and identifying the market for sales), they do not just look at the opportunities available in their own country. They consider international opportunities:
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Where can we get a good price for the materials and parts needed for production?
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Where could we build production facilities to keep production costs low?
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What markets are accessible to sell my products?
Companies make choices based on the answers to these questions. They can source raw materials from one country and transport them to another. There, the materials are processed in factories at reduced costs due to low taxes and labour costs and lenient labour and environmental regulations. Once the product has been manufactured, it is sent to other countries to be sold.
Most pieces of furniture have travelled around the world before ending up in our homes. Few pieces are actually built with entirely local materials and infrastructure.
For example, a company in Canada is developing a concept for a new table and chairs set. The company’s various departments located all over the world are in charge of its production. The panels and wooden parts are made in one country, while the metal parts (such as screws and plates) are made in another country. These parts are then sent to the same factory (in Asia or Mexico, for example) to be assembled and shipped to the company’s warehouse in Canada. All Canadian stores from British Columbia to Newfoundland pick up their inventory from this warehouse and sell the furniture to customers.
Increased international trade has led some regions of the world to become specialized in distinct branches of production. Some regions specialize in the extraction of raw materials (wood, ore, oil, etc.). Others receive these raw materials and manufacture the products (furniture, clothing, etc.). Others specialize in the design of technological products (such as computers or cellphones) or in the delivery of services (like business services or tourism).
This is known as the international division of labour. This does not mean that a country’s economy is based solely on one type of production, but this type of production represents a large part of its economy. India is an example of this. A large portion of its population works in agriculture. However, the IT sector is also well developed and employs just over a third of the population. For many years, India has been recognized for its IT services and software development. These activities contribute to a significant portion of the country’s GDP.
Companies in developed countries tend to benefit the most from the advantages of globalization since they have access to more financial resources. Many companies become multinationals and develop new markets in other countries. This includes emerging countries where consumer spending is increasing, which in turn increases the company's profits.
A multinational is a company that carries out activities in countries other than its country of origin (exploitation of resources, production of goods or services, research and development, etc.).
To learn more about multinationals, see the concept sheet on multinational corporations.
Globalization also impacts the population of developed countries. On the one hand, it gives them access to numerous products at affordable prices. On the other hand, it leads to increased outsourcing of many jobs, especially in the manufacturing sector. When looking for ways to reduce production costs, many companies move their operations to other countries. This means that the employees who used to manufacture the product have to find new jobs, since their work has been outsourced to another country.
Outsourcing refers to the relocation of all or part of the activities of a company to another country in order to reduce production costs. Relocation generally occurs from developed countries to developing or emerging countries.
When companies establish production sites such as factories in other countries, people migrate to find jobs. They move from rural or less developed areas to settle near production sites located in the city in order to find work. These migrations lead to the creation of large urban centres.
Capital is the sum of goods or money owned by a person, company or country. Capital can be used to make investments.
The capital provided by multinational companies helps develop infrastructure, especially in big cities, and improve the quality of life and income of part of the population. This influx of money helps developing countries modernize their economy and become emerging countries.
Some companies decide to move their activities to places with less strict laws on working conditions or environmental protection. This allows them to reduce their production costs by offering jobs with difficult working conditions and lower wages, while avoiding costs related to protecting water supplies or the atmosphere. The inhabitants of these regions end up living in polluted environments and working hazardous jobs.
Multinational companies also influence a country’s resource management. Because production choices tend to be geared towards the needs of the developed world, some companies monopolize resources. This means that the local population can no longer use these resources to support themselves.
A multinational cotton company buys up almost all the farmland in a region. The local population can no longer grow grains and vegetables to feed themselves, so they have to import food from another region, which is more expensive.
Alter-globalization is a movement that proposes alternatives to globalization. Alter-globalization activists want to reform globalization so that it respects the principles of human rights, economic justice and environmental protection.
The alter-globalization movement is supported by many organizations and associations around the world. It seeks to understand the negative economic, social, environmental and political consequences of globalization in order to develop more respectful and supportive alternatives for everyone. It promotes respect for human rights, environmental protection and economic justice.
Fair trade networks have also emerged to counter some of the effects of globalization and ensure a fairer distribution of income.
Ladouceur, Maude and Alain Parent. Globe. Cahier d’apprentissage, 2014, p.167-172.
Giguère Groulx, Jean-Félix and Marie-Hélène Laverdière. Immédiat. Richesse, 2017, p.26-29.