Global Trade

The dramatic growth in international trade over the past few years is one of the most striking features of globalisation.

While the world's economic output grew at an average 2.4% per year during the 1990s, global trade increased at well over twice that rate. The pattern is forecast to continue for the next 10 years too, with global trade growing at around 6.8% per year, more than double the projected growth in world output.

This increase in cross-border trade has been facilitated by international policy negotiations held under the General Agreement on Tariffs and Trade (GATT), the forum which has decided global trade rules since 1948.

The Uruguay Round of GATT negotiations, which was concluded in 1994, removed many barriers to 'free' trade, such as import tariffs and quotas. As a result, the volume of world trade has risen by over 50% in the space of just six years.

The globalisation of trade is the result not only of these new trade rules introduced by the world's governments. It is also dependent on two more concrete factors:

- The development of communications technology, which allows orders to be relayed across the world in seconds

- Cheaper transportation, which allows those orders to be fulfilled at greatly reduced cost. Sea freight unit costs have fallen by over 70 per cent during the past 20 years, while air freight costs have fallen by 3-4% year on year.

Global Production

Multinational corporations can now set up factories in almost any country in the world, relying on increased levels of automation to take the place of the skilled workers who were formerly required to run the machines.

Cheaper freight costs and instant communication facilities have allowed companies to coordinate production at different sites across the world. In fact, a third of global trade is just the international movement of goods between different parts of the same multinational.

One example of this can be found in the US car industry. When one typical US car was analysed to see how 'American' it was, it turned out that nine countries were involved in some aspect of its production or sale.

Roughly 30% of the car's value went to South Korea for assembly, 17.5% to Japan for components and advanced technology, 7.5% to Germany for design, 4% to Taiwan and Singapore for minor parts, 2.5% to the UK for marketing and advertising services, and 1.5% to Ireland and Barbados for data processing. Only 37% of the car's marketing value was generated in the USA.

As with trade, the growth in global production has also been aided by the Uruguay Round of GATT negotiations. In the past, national investment regulations governed where and how a company could start production in a foreign country, and many countries regulated foreign investment on grounds of economic interest, cultural sensitivity or national security.

As the pace of globalisation has intensified, multinationals have sought to have these restrictions removed so they can gain access to new (and cheaper) sites of production. The transfer of manufacturing plants from Western Europe to the developing countries of Asia is a direct result of this new freedom of investment.

Global Finance

The third main plank of economic globalisation is its financial aspect - the free flow of finance capital around the world. Once again, communications technology has made it possible to conduct financial transactions across the world at the click of a mouse. Over $1.5 trillion is traded on the world's foreign exchange markets every day.

While much of this activity has more relevance to currency traders than to the real world, the finance provided by private investors (also known as foreign portfolio investment) has been critical to the economies of several countries.

While foreign investment by multinationals accounted for half of non-government capital flows to the developing world in the eight years prior to the East Asian crisis of 1997-98, foreign portfolio investment accounted for a third. Countries such as Argentina, Brazil, Uruguay, Mexico, Thailand and South Korea actually attracted more investment from private investors than from multinationals.