Page 92 - Introduction to Business

66 PART 1 The Nature of Contemporary Business

its currency’s value (formally or de facto) to that of a major currency or a basket of
currencies (if it trades with a couple of major countries) and the exchange rate fluc-
tuates within a narrow margin around a central rate.

reality If you were involved in the business of international trade, would you
CH ECK prefer a fixed or a floating exchange rate system?

The Rise of Globalization

LEARNING OBJECTIVE 6
Describe the evolution of globalization.

Imagine yourself sitting relaxed on a leather couch in your house or apartment, sip-
ping a cup of hot coffee or tea, and watching a TV show on the Discovery Channel.
Chances are high that the leather couch you are seated on was made in Italy, the cup
was made by Corning of the United States, the coffee came from Brazil but was
processed by Nestlés of Switzerland or the tea came from India and was processed
by Lipton’s of the United Kingdom, the Sony TV was produced in Japan, and the Dis-
covery Channel program was being beamed live from Masai Mara in Kenya, not to
speak of the clothes from China that you may be wearing. All these advances have
globalization The process of eliminating been made possible by globalization, i.e., the process of eliminating trade, invest-
trade, investment, cultural, and even ment, cultural, and even political barriers that separate countries. It reflects the
political barriers across countries, growing commercial links among people, communities, and economies around the
which in turn could lead to freer
movement of goods, services, labor, world. Globalization has made it possible for goods, services, and capital to cross
capital, technology, and companies national borders; this in turn has allowed for the movement of labor and companies
across international borders
across international borders. It is reasonable to conclude that globalization is facili-
tated when barriers across national borders are brought down and the process is
accelerated as a result of lower communications and transactions costs brought
about through rapid development in information technology and the Internet.
The news media might give you the impression that globalization is a recent
phenomenon. Unfortunately, that’s not the case. The dawn of globalization can be
traced back to the fifteenth century when the Portuguese navigator and explorer
Vasco de Gamma made voyages to Kerala State, on India’s west coast, in search of
spices to satisfy European palates. It was about the same time when Arabs and Chi-
nese traders were making similar voyages to facilitate trade in spices and silk.
Goods, people, and ideas have been traveling across the globe ever since that time.
More recently, globalization began to accelerate after World War II, starting in 1944
with the creation of such international institutions as the World Bank (www.world-
bank.org), the International Monetary Fund (www.imf.org), and later the General
Agreement on Tariffs and Trade (GATT), now called the World Trade Organization
(www.wto.org). While globalization may be good for all concerned, much depends
on how the “rules of the game,” that is, fair trade and investment policies and har-
nessing the Internet, are implemented.

The World Trade Organization
In 1947, a couple of years after the end of World War II, the General Agreement on
Tariffs and Trade (GATT) was set up to oversee and liberalize multilateral trade
arrangements. The GATT was established as the world’s most important trade pol-
icy institution, whose primary objective was to increase trade and economic wel-
fare among member countries. To achieve this goal, countries were encouraged to
lower their tariff barriers, as well as eliminate quotas and subsidies on merchandise
exports and imports. The successive lowering of tariff and nontariff barriers (like
product specification, size, etc.) was done through successive rounds of multilat-
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