1. Increasing trend of international trade of goods and services and international
2. This has been facilitated by lowering trade barriers across countries through
organizations such as the WTO. International trade has also been greatly
facilitated by the sharp reduction in transportation (container shipping) and
communication costs (large cable, wireless and internet investments were made
during the tech boom of the 1990s). This has enabled the deconstruction of the
value chain allowing suppliers from different countries to specialize and
participate in the value chain.
3. Huge labor force of China and India has in the last decade entered the global labor
force resulting in far reaching changes.
4. China has become one of the most efficient low-medium skilled manufacturing
economies and has been shifting up the value chain. China has been able to
sustain an average GDP growth rate of about 10% over the last 25 years. This has
made manufacturing very competitive and many manufacturing facilities in the
developed world have had to shut down and shift to lower cost facilities
elsewhere. Services have also become very competitive with a great deal of
outsourcing taking place to countries like India.
5. This was initially a factor in keeping inflation low throughout the world (despite
easy liquidity driven by low interest rates) due to their lower costs driven by
lower labor costs and high productivity.
6. It also has enabled significant wealth creation in these economies and a reduction
in the population living in poverty.
7. The rapid growth of China and to some extent India has been one major
determinant of the rise in oil and commodity prices including food prices.
8. The commodity price boom has created significant wealth in commodity rich
countries like the middle eastern countries and some latin american countries like
Brazil. Sovereign wealth funds now run in the hundreds of billions of dollars and
will become major players in global capital markets.
9. Several asian and latin american economies have been running trade surpluses for
a number of years and have significant foreign currency reserves. There are now
in much better financial shape than in the past. Central banks in countries like
China, Japan and South Korea now have foreign currency reserves than run in the
hundreds of billions of dollars.
10. Their large investments in US treasury bonds have been a factor in keeping long
term U.S. interest rates low and the dollar relatively strong. One motive is to place
the reserves in safe and liquid instruments. The other motive is to keep their
currencies from strengthening against the dollar to preserve their export growth.
11. The emergence of these economies will enable global growth to be more balanced
and not be over reliant on the U.S. consumers who are overleveraged and also
enable the U.S. to work down its deficits. Internal demand is developing in these
countries and there will be less reliance on exports in the future. This will reduce
their incentive to keep their currencies undervalued and may result in a shift in the
way they invest their reserves. If there is major shift away from U.S. dollar assets,
U.S. interest rates would rise and the U.S. dollar would fall.
12. The costs and benefits of globalization are typically born by different segments.
Large firms (MNCs) are on average better able to exploit the benefits of
globalization than small or medium sized firms. Wealthy individuals and higher
level management benefit more from globalization than middle or lower level
workers who are more liable to be laid off. The transition of these laid off workers
to similar paying jobs is not easy or smooth and this can cause political pressures
and protectionist sentiment.
13. Functions such as design, branding and marketing become critical and can capture
a significant portion of the final selling price (e.g. branded shoes, IPODs etc.).
The challenge for the developed economies is to come up with more innovation
and new technologies where they have an edge over the lower cost countries. And
here the ability to protect intellectual property rights (patents, copy rights, trade
marks etc.) is critical to protecting the investment in innovation and new
technology to ensure an adequate return on them. Several emerging market
economies do not have adequate protection of intellectual property rights and so
companies should be careful in sharing key technologies.
14. Summing up, the world has become flat and the playing field has become global.
Threats to existing businesses can come from any where in the world and
opportunities arising from all over the world should be exploited. This is already
happening with over 50% of sales of some of the largest U.S. firms arising from
1. Increases political and economic links between European members.
2. Increases depth of capital markets with a single currency instead of fragmented
markets with different currencies. This generally lowers the cost of capital for
3. Reduces costs of transaction within the eurozone – no currency exchange costs,
no need to hedge foreign exchange risks, reduces uncertainty.
4. Makes companies more competitive since they are subject to free competition
from companies in the eurozone. There are no tariffs and other barriers between
eurozone countries which allow freer competition.
1. Eurozone countries no longer have independent monetary policy and exchange
rate policy to deal with country specific shocks. Hence, shocks have to be
absorbed through wage and fiscal flexibility.
2. As can be seen from the current euro debt crisis, monetary union without fiscal
union can create risks for the entire eurozone. There is also a risk of contagion
with problems in Greece spreading to Ireland, Portugal, Spain and Italy.
Responses to the current sovereign debt crisis in the eurozone:
1. A EFSF (European Financial Stabilization Facility) has been set up and funded by
eurozone countries to help support the troubled countries.
2. The IMF (International Monetary Fund) has also been providing support.
3. The ECB (European Central Bank) has been buying bonds of the troubled
4. Most of the support has been accompanied by conditions that require the troubled
countries to reduce deficits and debt levels (austerity measures) which is political