Paper: State Decisions Under Globalization
This paper was submitted for “Political Science 20: World Politics” with Professor Richard Anderson and Michael Stone in Spring 2009. The PDF will be available shortly.
Globalization, as suggested by Nau, is the process of consolidating into a single global economy (273). Nau uses Thomas Friedman’s The Earth is Flat as the framework for the history of globalization and the shift from absolute power to institutions to individuals (277). However, the working definition of globalization I will be using is a bit different. I will focus on the effects of transport costs under globalization. Reduced transport costs allow cheaper goods to be bought from foreign countries, increasing overall absolute global trade. There are seven distinct areas of policies that a government can enact that directly affect its relationship to the globalized world economy (328), but I will focus exclusively on trade policy and how a state can manipulate trade policy in response to globalization. The decisions on a systemic level result from compromises and resolutions on the domestic level. While globalization has allowed for increased specialization and the division of labor, states still have the ability to control domestic policy in its interest. However, the extent to which a state can respond to international economic pressures is dependent on its capacity and willingness to compromise or be left behind in a globalizing world. The actions of both developed and developing states are ultimately enhanced and constrained, respectively, in a globalized economy.
Since globalization has dramatically decreased transport costs, which has induced high levels of trade, countries are forced to make decisions regarding trade policy often. Trade policy affects the prices of goods and services through taxes, subsidizations or quality restrictions, which can be broken down into two categories: tariffs and non-tariff barriers (332). It is also a border policy, that is, it is a foreign economic policy that only affects goods, services, capital and people as they cross national boundaries (328). This is particularly important because it recognizes the sovereignty of each state and its power to make decisions within its borders and its own country. Tariffs are taxes on goods and services crossing borders such as customs fees and duties, export taxes or subsidies while non-tariff barriers are policies that do not concern price, such as quotas, embargoes or qualitative restrictions (333).
Despite these policy abilities, not all countries have the capacity to enact all of these regulations. The difference in the capacity to implement trade policies is most evident between developed and developing countries. From a realist perspective, which emphasizes relative distribution of power and favorable security conditions, a country may enact a unilateral tariff to secure its alliances or its own hegemony, or use economic sanction such as an embargo to punish adversaries. While a developed country such as the United States has the ability to place an embargo, a trade policy that effectively reduces imports or exports to zero (333), on another country either as a political or economic tool, a developing country such as India may not have the same luxury because the relative cost will be greater. It may risk disengaging from the global economy. The non-tariff barriers, such as quality restrictions, are also constrained by different states’ capacity. Qualitative regulations include restrictions based on the safety, health, labor standards, and environmental concern of traded products (333). Similar to developing countries’ high costs of enacting tariff trade policies, refusing a multinational corporation for low labor standards, for instance, comes at a high cost – possible investment into the country. From a liberal perspective, countries would depend on the strengthening of global rules and institutions that regulate trade policy, such as the World Trade Organization, where security and economic policies are separate and sanctions are not instruments of security policy. Developing countries particularly depend on the function of institutions such as the WTO to limit international payment balances. For example, countries are currently in the ninth round of trade talks, the Doha Round (362). This round of trade talk will eventually influence domestic policy based on agreements during the talk. Countries’ national policies will be coordinated through negotiations during the Doha Round, as they were during the Tokyo Round and the Uruguay Round (361-362). Therefore, all decisions on a domestic level are a compromise between the country’s citizens and the state’s interest in the globalized economy.
Globalization, with its low transport costs, has allowed for increased specialization and the division of labor between many countries. Specialization enables individuals or countries to gain proficiency and be the most effective at their individual task – which paves the way for comparative advantage. This process of specialization and division forms what are called Global Commodity Chains. An example of a well-known GCC is Nike, which distributes its production, marketing and other functions across several countries. Comparative advantage, which is based on relative advantage within a country, is only effective between two countries if they are able to freely specialize then trade their products. Again, domestic governments still have the option to control these trade policies through the mechanisms mentioned above because specialization is predicated on a free market. With the onset of increased market liberalization in the past few decades, there was an increase in specialization and trade based on comparative advantage. From a realist perspective, specialization within a regional bloc, also called geoeconomics, increase its relative power and economic competition. However, from a liberal perspective, free-trade policies and stronger enforcement of trade agreements through international institutions are favored over unilateral decisions such as sanctions. Liberals saw this time of liberalization as an opportunity for non-zero sum gains, or absolute gains, and the strengthening and development of global institutions. Again, there is a wide discrepancy in the ability of developed versus developing countries to react to market liberalization. The cost of a country liberalizing could come at the high cost of not protecting its infant industries, or developing industries that require protection to get started, as several Latin American countries did (351). Realists would support these protectionist policies because they are indifferent to how individuals manage their domestic economic policy and favor the inward-first approach; while, liberals would favor market integration and an outward-first approach. The decision of countries to respond to globalization’s increased specialization is largely dependent on the country’s capacity and relative cost of the decision.
Works Cited
Nau, Henry R. (2009) Perspectives on International Relations, 2nd ed. Washington, DC: Congressional Quarterly Press Inc.
Tagged as Development, Economy, Global Commodity Chains, Globalization, Trade, US, WTO + Categorized as Portfolio, Writing, Academic Papers