Financial and Monetary Systems

What is globalization anyway?

What is globalization

Let's find out what is globalization Image: REUTERS/Nicky Loh

Alex Gray
Senior Writer, Formative Content
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Globalization – a phenomenon that has defined the world's economy in recent decades – is under pressure. As Donald Trump prepares for his tenure in the White House, he talks of dismantling a whole history of globalized trade that he sees as having had a catastrophic effect on the global economy.

His strategy so far has involved tearing up established trade agreements, such as NAFTA, and burying others that are yet to get off the ground. One of these is the Trans-Pacific Partnership, which he has slammed as “a potential disaster for our country”. The incoming president's pledge to "make America great again" is based partly on challenging countries such as China by limiting imports and boosting exports.

But the backlash against globalization is not confined to the United States. In the United Kingdom, the Brexit vote saw a majority of citizens prioritize immigration controls over membership of the world’s biggest trading bloc. Those who wished to remain in the EU accused those who wished to leave of being protectionist, even racist – but much of the concern over immigration stemmed from fears (real or imagined) over the number of new people arriving on British shores and what it would mean for jobs, the economy and British life as they knew it.

If globalization is facing a fundamental threat, perhaps now is a good time to remind ourselves of exactly what it is.

How globalization works

In simple terms, globalization is the process by which people and goods move easily across borders. Principally, it's an economic concept – the integration of markets, trade and investments with few barriers to slow the flow of products and services between nations. There is also a cultural element, as ideas and traditions are traded and assimilated.

Globalization has brought many benefits to many people. But not to everyone.

What is globalization - economic angle

To help explain the economic side of globalization, let's take a look at the well-known coffee chain Starbucks.

The first Starbucks outlet opened its doors in 1971 in the city of Seattle. Today it has 15,000 stores in 50 countries. These days you can find a Starbucks anywhere, whether Australia, Cambodia, Chile or Dubai. It's what you might call a truly globalized company.

And for many suppliers and jobseekers, not to mention coffee-drinkers, this was a good thing. The company was purchasing 247 million kilograms of unroasted coffee from 29 countries. Through its stores and purchases, it provided jobs and income for hundreds of thousands of people all over the world.

A farmer holds organic coffee beans at a coffee field in the mountains of Peru's central jungle city of Chanchamayo August 11, 2008. Coffee production in Peru, the world's largest exporter of organic coffee, is booming as growers focus on quality, develop niche markets and find ways around walls that can block growth. Picture taken August 11, 2008.    REUTERS/Enrique Castro-Mendivil (PERU) - RTR21CJO
Image: REUTERS/Enrique Castro-Mendivil

But then disaster struck. In 2012, Starbucks made headlines after a Reuters investigation showed that the chain hadn't paid much tax to the UK government, despite having almost a thousand coffee shops in the country and earning millions of pounds in profit there.

As a multinational company, Starbucks was able to use complex accounting rules that enabled it to have profit earned in one country taxed in another. Because the latter country had a lower tax rate, Starbucks benefited. Ultimately, the British public missed out, as the government was raising less tax to spend on improving their well-being.

How did globalization happen?

We might think of globalization as a relatively new phenomenon, but it’s been around for centuries.

One example is the Silk Road, when trade spread rapidly between China and Europe via an overland route. Merchants carried goods for trade back and forth, trading silk as well as gems and spices and, of course, coffee. (In fact, the habit of drinking coffee in a social setting originates from a Turkish custom, an example of how globalization can spread culture across borders.)

Have you read?

What drives globalization?

Globalization has speeded up enormously over the last half-century, thanks to great leaps in technology.

The internet has revolutionized connectivity and communication, and helped people share their ideas much more widely, just as the invention of the printing press did in the 15th century. The advent of email made communication faster than ever.

The invention of enormous container ships helped too. In fact, improvements in transport generally – faster ships, trains and airplanes – have allowed us to move around the globe much more easily.

A ship is loaded with containers at Sydney's Port Botany container terminal March 4, 2013. Australia's trade deficit shrank by much more than expected in February to its smallest in 14 months thanks to higher prices for resource exports, a likely boost to profits and incomes that also gave the local dollar a lift. Wednesday's figures from the Australian Bureau of Statistics showed exports climbed 3.3 percent overall to a seasonally adjusted A$25.64 billion, the highest total in eight months. Earnings from farm goods, coal, metals and iron ore all increase in the month thanks in part to rising prices. Picture taken March 4, 2013.   REUTERS/David Gray   (AUSTRALIA - Tags: BUSINESS) - RTXY7G5
Image: REUTERS/David Gray

What's good about it?

Globalization has led to many millions of people being lifted out of poverty.

For example, when a company like Starbucks buys coffee from farmers in Rwanda, it is providing a livelihood and a benefit to the community as a whole. A multinational company's presence overseas contributes to those local economies because the company will invest in local resources, products and services. Socially responsible corporations may even invest in medical and educational facilities.

Globalization has not only allowed nations to trade with each other, but also to cooperate with each other as never before. Take the Paris Agreement on Climate Change, for instance, where 195 countries all agreed to work towards reducing their carbon emissions for the greater global good.

This chart, however, shows that global attitudes towards globalizing forces aren't all that good. It shows that, in fact, in all but a couple of countries polled, people believe life was better in the old days.

What's bad about globalization?

While some areas have flourished, others have floundered as jobs and commerce move elsewhere. Steel companies in the UK, for example, once thrived, providing work for hundreds of thousands of people. But when China began producing cheaper steel, steel plants in the UK closed down and thousands of jobs were lost.

Every step forward in technology brings with it new dangers. Computers have vastly improved our lives, but cyber criminals steal millions of pounds a year. Global wealth has skyrocketed, but so has global warming.

While many have been lifted out of poverty, not everybody has benefited. Many argue that globalization operates mostly in the interests of the richest countries, with most of the world's collective profits flowing back to them and into the pockets of those who already own the most.

Although globalization is helping to create more wealth in developing countries, it is not helping to close the gap between the world's poorest and richest nations. Leading charity Oxfam says that when corporations such as Starbucks can legally avoid paying tax, the global inequality crisis worsens.

Basically, done wisely (in the words of the International Monetary Fund) globalization could lead to "unparalleled peace and prosperity". Done poorly, "to disaster".

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