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Chapter 12 Globalization, Trade, and Corruption. McDonald’s Corporation Opening Case. More than half of McDonald’s restaurants are outside of the U.S., accounting for 61% of company revenues As a prominent global brand McDonald’s symbolizes perceived evils of globalization
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McDonald’s Corporation Opening Case • More than half of McDonald’s restaurants are outside of the U.S., accounting for 61% of company revenues • As a prominent global brand McDonald’s symbolizes perceived evils of globalization • In developing nations, the arrival of a McDonald’s is regarded as a sign of modernization
McDonald’s Corporation Opening Case • McDonald’s does transfer cultural values and practices • Most of McDonald’s international restaurants are franchises, run as local businesses • The entrepreneurs who run these businesses adapt them to local custom
Globalization? • Globalization: Growth in networks of economic, political, social, military, scientific, or environmental interdependence to span worldwide distances
Figure 12.2 - The KOF Index of Globalization and Subindexes: 1970–2010
Pros of Globalization • Has lifted millions of people out of poverty • Consumer benefits of more variety, lower costs, and higher quality of products • Improved working conditions for millions of workers • Human rights have improved
Ascent and Inertia • Great benefit of globalization is human progress • Since 1970, 155 countries with about 95 percent of world population have experienced rising incomes • Global progress is not uniform
Trade • The mainspring of globalization is trade • The total value of merchandise exports rose from $58 billion in 1950 to a high of $16.1 trillion in 2008
The Rise and Fall of Trade • Before 1800, growth of the world economy was slow and limited • The richest European nations, the dominant traders of the time, ran their economies according to the theory of mercantilism • Mercantilism: A policy of increasing national power by managing the economy to create a trade surplus • Exports were promoted, imports restricted
The Rise and Fall of Trade • The great run of free trade ended with World War I, which inflamed global markets with national conflicts • In the United States an isolationist, Republican Congress passed the remarkably unwise Smoot-Hawley Tariff Act in 1930 • Tariff: A tax or duty charged by a government on goods moved across a border
The Rise and Fall of Trade • In the downward spiral of retaliation and bitter national rivalries some governments moved in the direction of autarky • Autarky: A policy of national self sufficiency and economic independence
A New Postwar Order • After the war, representatives of the victorious nations met in the small town of Bretton Woods, New Hampshire, to forge an agreement • They created three institutions that began their work in 1947 • World Bank • International Monetary Fund • International Trade Organization
A New Postwar Order • The rules were built around two key principles • Most favored-nation • National treatment
Regional Trade Agreements • The European Union (EU) • The North American Free Trade Agreement (NAFTA) • The Association of Southeast Asian Nations Free Trade Area (AFTA) • The Southern Common Market (Mercosur)
Why Free Trade? • Free trade: The flow of goods and services across borders unhindered by government imposed restrictions such as taxes, tariffs, quotas, and rules • Competitive advantage of nations: The theory that having a cluster of similar producers gives a nation special advantage over other countries
Why Free Trade? • Law of comparative advantage: Efficiency and the general economic welfare are optimized when each country produces that for which it enjoys a cost advantage • It is argued that free trade will stimulate competition, reward individual initiative, increase productivity, and improve national well-being
Why Protectionism? • Protectionism: The use of trade barriers to shield domestic industries from foreign competitors • It exists in the trade histories of all nations for four basic reasons: • Barriers help to lower unhealthy trade deficits • Some governments use an industrial policy to promote the growth of technologies, companies, or industry sectors
Why Protectionism? • Foreign countries sometimes use unfair trade tactics • Tariffs are important sources of revenue for some governments, particularly in low-income countries
Free Trader Responses to Protectionists • Free traders advance many arguments against protectionism • One main argument is the logic of overall benefit • A major cause of the rise in world trade is the widespread reduction in defensive barriers
U.S. Deviation from Free Trade Policy • Despite strong free trade rhetoric and the steady lowering of tariff and other trade barriers, the United States protects industries from foreign competition • The Federal Buy American Act • The Merchant Marine Act • The Passenger Vessel Services Act • U.S. tariffs have declined significantly in recent years, but there are many exceptions
Tariff Barriers in Other Countries • China still imposes substantial barriers on imports such as watches, automobiles, steel, textiles, and many food products • Japanese restricts U.S. imports of meat, poultry, vegetables, and fruit products • Various restrictions among European Union countries are applied to genetically engineered commodities • Taiwan restricts imports of rice
Tariff Barriers in Other Countries • Korea imposes high duties maintains a broad range of trade restrictions and nontariff barriers on agricultural and fishery products • Brazil still retains high tariffs on technology products • Mexico still retains substantial trade restrictions on products such as meat, poultry, vegetables, and fruit
Corruption • Corruption: The debasement of integrity for money, position, privilege, or other self-benefit
The Fight Against Corruption • The Foreign Corrupt Practices Act (FCPA) makes it both a civil and a criminal offense to bribe an official of a foreign government or ministry, or a member of a foreign political party or candidate for office • The FCPA is a powerful law with global reach
The Fight Against Corruption • Basic actions multinational corporations can and do take to fight corruption • Set up an ethics and compliance program • Establish appropriate policies • Publicize the anti-corruption program to establish a reputation for honesty • Train employees • Assure confidential, rapid reporting of solicitations to management
The Fight Against Corruption • Enforce penalties against violators • Use due diligence when hiring agents, consultants, and intermediaries or when taking on new business partners • Work with international organizations, industry groups, and other companies to share information about experiences with corruption
Concluding Observations • The integration of humanity is greater now, despite some resistance, because of new technologies • Economic globalization has led the way • One major impediment to this growth is corruption • There is widespread and effective effort by governments to control it
