The Threat of Globalisation

So fears are perhaps unfounded that TNCs are becoming too powerful, but there are those who argue that the current drive towards free international trade constitutes globalisation, and that there are dangers associated with this. Free trade is said to benefit large corporations leaving ordinary workers behind. Efforts by the WTO to reduce barriers to trade are alleged to be backed by capitalists and are therefore not in the interests of consumers and workers. To assess the credibility of these claims, I shall examine the grounds for and consequences of increased international trade. I will use the Hecksher-Ohlin-Samuelson model to do this because trade between countries with similar levels of technology dominates the international markets. This model assumes that capital and labour in both trading countries are fixed, that they can be split between production of X and Y and that they are homogeneous. Production of X is labour intensive and that of Y is capital intensive. Finally, goods and factor markets are perfectly competitive with no other distortions such as tax. Crucially, for my use of the model in this case, the level of technology in country H and F is identical but their factor endowments are different. That is country H is relatively well endowed with capital and country F is relatively well endowed with labour. It is important to note that relativity allows one country to have higher absolute supplies of both labour and capital.

Country H could concentrate completely on production of good X or of good Y,

X = f(L + K) Y = g(L + K)

but by doing so they would be using resources in production of one good that might be better used in production of the other. Therefore the production possibility frontier

is concave. Note also that because country

H is well endowed with capital, it can produce more of capital-intensive good Y than labour intensive good X, hence the bias in the curve towards production of Y.

Because competitive firms wish to maximise profits, we can assume they will produce at some point along this PPF. The utility maximising consumers decide where. An important assumption made by economists in many trade models is that of community indifference curves (CIC). We can take an aggregate of all individual indifference curves to make a set of CIC. As long as trade is not allowed, production will take place at wherever the PPF is tangent to the CIC that is furthest from the origin. This is our autarkic point. One final point to make is that at this point the price ratio is equal to the slope of the PPF or the marginal rate of transformation (MRT). Mathematically,

p = px/py = MRT = ??Y/?X

(where px and py equal the respective prices of X and Y). Thus for given production functions and community preferences in autarky country H will produce and consume at Ah. Similarly with opposite factor endowments but facing the same production functions and community preferences, country F will produce and consume at Af.

Allowing free trade means that producers face a new international price ratio as a result of the equalisation of prices. They now have an incentive to produce more of what they can export because the can receive a higher price for it. The Heckscher-Ohlin theorem states that 'a country will export the good which intensively uses its relatively abundant factor.' (Markusen et al 1995, p.106). So in country H, the price of good Y will rise while that of good X falls, causing consumers to prefer good X. Producers of X however see higher profits can be made by producing good Y and because factors are intersectorally mobile, they can do so. The resulting surplus of Y can be exported at the international price level. Finally, consumption will occur where the international price ratio is tangent to the CIC furthest from the origin.

Another consequence of free trade is the equalisation of factor returns. This is the consequence that labour unions in the developed world are concerned about. In our example, country H (we shall now assume to be the U.S.) experiences an increase in the price of capital-intensive good Y (which might be aeroplanes) and a decrease in price of labour-intensive good X (for example textiles).

The important consequence of different factor endowments in the two countries is that the resulting price ratios of goods X and Y are different. Therefore in country H, capital-intensive good Y is relatively cheap and labour-intensive good X is relatively expensive with the opposite being true in country F. Lowering the barriers to trade gives consumers in H access to the markets in country F, where they can buy the labour intensive good X more cheaply. Similarly, consumers in country F can buy good Y cheaply if they import it from country H. Producers in each country are then forced to adjust production to suit the new patterns of demand

In questioning globalisation, Hirst and Thompson (1995) investigate the flows of capital around the world and show

They suggest that negative consequences of this may include a reduction in the power of governments to control their own affairs. Although this is an important issue, worry from the perspective of an economist is the extreme pursuit of economic development with no consideration of health or ecological issues

There are those who assert that globalisation is desirable and use economic theory to show that all countries concerned can benefit from an increase in trade. Alternatively there are those who question whether globalisation is really happening and conclude that there are not as yet trans-national companies who

Julius (1990) and Ohmae (1990) claim that numerous TNCs within the developed world go wherever investors see a return on their investments. So during the 1980s a smart TNC would initiate operations in the emerging markets of Korea, Taiwan and Hong Kong. When confidence was broken in the 1990s it would withdraw its assets from East Asia and head for safer shores to take advantage of the 'new economy' in the U.S. This leads many to think that by examining capital flows one can identify transnational companies.