Globalization A Historical Geography of the World Economy

Globalization: A Historical Geography of the World Economy Introduction Humans are a global species adaptable to tropical, temperate, and tundra environments. By the end of the last ice age, humans had globalized, having migrated from Africa and Eurasia to the Americas and penetrated the most southerly areas of South America. Today when we speak of globalization, we are referring to the reduction of barriers to international trade and the movement of cultural traits, ideas, capital, and elements of popular culture around the world. Humans still migrate long distances, but the language of globalization does not include the free movement of people. Most countries have immigration laws that limit entry. But there has been progress for, until recently, Communist countries—including China, the Soviet Union, and the states of Eastern Europe—in controlled outmigration or emigration. Now more people are free to migrate internationally, if they can obtain residence in their country of destination. The Global System The globalization of today that encourages the movement of raw materials, manufactured goods, agricultural commodities, and investment can be viewed as evolving in three stages, with two major retrogressive intervals: Globalization, Stage 1 (“G.1”): The Age of Exploration, 1492–1776 Retrogression: The Atlantic Wars, 1776–1815 Globalization, Stage 2 (“G.2”): The Age of Industrialization, 1815–1947 Retrogression: World War I, the Great Depression, World War II  G.1: The Age of Exploration (1492–1776) The voyages of exploration of the sixteenth, seventeenth, and eighteenth centuries opened up world resources to exploitation. Magellan’s round-the-world voyage made a profit! The sale of the spices on the one ship that completed the circumnavigation of the globe more than paid for the enterprise. The new world yielded precious metals, timber, dyes, and harvests of sugar and spices and things not so nice such as tobacco. Plants and animals like wheat and sheep were introduced into Western Hemisphere environments, and corn, potatoes, beans, tomatoes, and squashes were transferred into Old World agriculture. The age of exploration resulted in a great opening up of earth resources: animal, vegetable, and mineral. However, the colonial powers that exploited distant territories created closed systems. They did not promote trade with each other, and monopolies were encouraged within colonial systems. The colonial systems were mercantilist. Spain developed a closed colonial economic system. All trade with the Spanish Americas was conducted through Seville, a port city on the Guadalquivir River that flowed to the Atlantic. Vessels could only trade with designated ports in the Caribbean and the Gulf of Mexico and sailed in convoys (flotas) for protection and control. The Spanish colonial trade system stretched across the Pacific to the Philippines, but trade between Acapulco and Manila was regulated. The Portuguese system was not so closed as the Spanish. Brazil produced more sugar than Portugal could absorb, and the commodity was sold into Dutch markets. The Dutch and the English crowns encouraged private corporations to undertake overseas trade and settlement, but the companies—for example, the Dutch East India Company, the Virginia Company, and the English East India Company—were often given monopolies. As is well known, it was the extension of the (English) East India Company’s monopoly on the tea trade to the American colonies that set off trouble. The leaders of Britain, France, Portugal, and Spain did not want to open up their colonial trade to competition from rival nations, although the Dutch tried to force them to do so. Nevertheless, conflicts among these powers did destroy or change their trading systems.  Regression: The Atlantic Wars (1776–1815) The Atlantic wars, starting with the American Revolution, broke up, damaged, or modified closed colonial systems. During the Napoleonic Wars, France came to control much of Europe and under the Continental System worked to exclude British trade from the region. For its part, the Royal Navy blockaded the coasts of Europe and only allowed into ports authorized cargoes, profitable to Britain. Sugar from French Caribbean islands was not admitted, and it was at this time that French manufacturers began to use sugar extracted from sugar beets. As we shall see, in the twentieth century, those who would control the continent of Europe became keen to seek synthetic substitutes to reduce the need for imports. At the end of the Napoleonic Wars, there was a new world order. The Spanish empire in Mexico, Central America, and South America had gone. Brazil was on the way to separating from Portugal. The French and the Dutch lost overseas territories. The British gained strategic territories like Malta, Ceylon, Mauritius, and the Cape of Good Hope, but their imperial vision was altering. The wars had not halted the Industrial Revolution, and now British traders wanted access to overseas markets as an outlet for cotton textiles, ceramics, metalware, and many other goods. The Royal Navy was able to assure freedom of navigation and suppress piracy from a network of overseas bases that spanned the globe. G.2: The Age of Industrialization (1815–1913) The Congress of Vienna (1814–1815) brought peace among the nations of Europe, but the end of the Napoleonic Wars was marked by a slump in world trade. The United States, via the Monroe Doctrine (1823), made it clear that it did not want new colonial claims in the Western Hemisphere, and this view coincided with Britain’s. Britain wanted the former Iberian colonies opened to trade and, as independence came, quickly recognized the new Latin American states and appointed consuls to facilitate travel and trade by British subjects. Argentina was recognized in 1825 and a consul appointed at Buenos Aires. Other newly independent Latin American states were recognized.  In Britain, the advantages of worldwide competitive trade were realized, and as the manufacturing industry grew and the population urbanized, new interests questioned the need to protect British farmers with high tariffs that kept out cheap food from overseas sources. In 1846, with the repeal of the Corn Laws, markets in Britain were opened to cheaper grain grown on the prairies and plains of North America, the grasslands of Australia, and the steppes of south Russia. Soon cheaper sugar from non-British Caribbean islands, such as Cuba, was reaching markets in Britain as the country moved toward a policy of free trade, eliminating tariffs on goods entering the country. There was an imperialism to free trade, for free trade is a policy for strong countries with goods and services to sell worldwide. Protecting Markets Other countries saw advantages in protecting home markets to encourage the growth of industries in national territory. The second half of the nineteenth century was marked by an increasing size of states as countries unified, or reunified, in part to create and protect larger market areas. The Civil War prevented fragmentation of the U.S. market, in Japan the Meiji Restoration (1868) established a central government that implemented nationalistic economic policies, and the German empire was created in 1871 (many German states had formed the Zollverein, a customs union, in 1834). Italy emerged between 1859 and 1870. From an economic viewpoint, the most interesting of the emerging larger states was Austria-Hungary, which in 1867, with the Ausgleich (“compromise”), created the dual monarchy with joint foreign and financial policies. Austria-Hungary had free trade between the countries and regions of the empire, common tariffs on goods entering the economic space of the imperial system, and eventually, a common currency and financial policies. The Austria-Hungary economic model was a forerunner of the European Union. The United States, which industrialized rapidly after the Civil War, saw the advantages of protecting the home market for growing industries with tariffs. By the 1890s, the United States had the largest economy in the world and a positive balance in international trade, but this did not stop President McKinley from imposing even higher protective tariffs. Protecting Free Trade  By 1900, Britain was enjoying the benefits, and suffering the disadvantages, of free trade. Britain was a market in which goods from many sources competed for sales, and prices were competitive. On the debit side, cheaper products—made in Germany, for example—were entering Britain and taking market share from British manufacturers. Further, as Britain imported so much, the country had an adverse balance of trade with all major trading partners and, against popular belief, an adverse trade balance with her overseas territories. Table 1: U.S. Leading Trade Partners, 1900 In 1900, total U.S. imports were valued at just over $1 billion and exports were worth $1.5 billion. Imports From (in millions of dollars) Exports To (in millions of dollars) Canada $39 $95 UK $160 $534 Japan $33 $29 Germany $97 $187 France $73 $83 Mexico $29 $35 How was the huge adverse balance of trade paid for? British trading and investment institutions were at the center of the global commercial system. The pound sterling was the leading currency used in international trade, the banks in London cleared payments, the British shipping lines carried more than half of all world trade, Lloyd’s insured the ships, and investment houses put profits into the London Stock Exchange and British bank notes. Overseas investments were made in Canada, Argentina, the United States, Chile, Australia, New Zealand, India, and the Far East. Dividends from these overseas investments helped pay for imports. When, in 1903, British manufacturing interests wanted tariff reform (protectionism), the campaign was opposed by bankers, investment institutions, insurers, shipping lines, and merchant houses. No political party, prior to World War I, would adopt a policy of tariff reform. There was more money to be made in the global economy than in producing metal products on northern coalfields, and there was an expanding export market for British coal in western Europe and to coal bunkers in ports around the world. In the years before World War I, international trade accounted for a higher percentage of total global economic activity than was achieved until the late twentieth century. The international movement of voluntary migrants was at high levels with Britons, Germans, Scandinavians, Italians, Bohemians, and Poles coming to America and other countries like Australia, Argentina, Canada, New Zealand, and Brazil. Migrants entered and settled with few restrictions if they were of European origin.  Regression: World War I, the Great Depression, World War II (1913-1947) Commentators look back on the prewar years as the golden age, the Edwardian era, the belle époque, for the system of relatively free movement of people, goods, commodities, and currencies was to be crippled by World War I. Woodrow Wilson set out some of the conditions of globalization in his Fourteen Points address: freedom of navigation, reduction of armaments, open diplomacy, and the removal of barriers to trade among all nations. Nothing of the sort happened. The unified Austria-Hungary economic space broke into new countries, each with its own tariff barriers and generally weak currencies. All European states taking part in the war ended the war in debt. Germany and its allies had unpayable bills for reparations. When payments were behind, in January 1923, French and Belgian troops moved into the Ruhr. Much German industry shut down, and the mark became nearly worthless. Worse, as the economist Keynes had predicted in The Economic Consequences of the Peace (1919), the economy of Europe could not thrive without Germany. The United States had apparently done well in the war, emerging as by far the strongest economy and the largest creditor, with New York assuming the role of global financial center. Postwar the prices of agricultural commodities such as wheat were high. New industries like the cinema and radio emerged and, along with the mass marketing of cars, urban growth (the United States had an urban majority by 1920), suburbanization, and sales of consumer goods, it appeared that the country was poised for sustained economic growth. The Great Depression The stock market crash (1929), followed by the near collapse of the banking system, led to the shutdown of many manufacturing activities and massive unemployment. With U.S. financial institutions greatly weakened, other interests were able to lobby for protectionist policies. The infamous Hawley-Smoot Tariff Act (1930) raised tariffs at a time when the United States had a positive trade balance with all major trading partners except one! Japan was the exception, and the deficit with Japan was more than made up by the large positive balance on trade with Britain (see Table 2).  Table 2: U.S. Trade Partners, 1928 In 1928, the United States imported goods to the value of $4.1 billion, and exports were valued at $5.2 billion. Imports From (in millions of dollars) Exports To (in millions of dollars) Canada $489 $915 UK $349 $847 Japan $384 $288 Germany $222 $467 France $159 $241 Mexico $125 $116 Table 3: U.S. Trade Partners, 1934 In 1934, the United States imported goods to the value of $1.7 billion. Exports generated just over $2 billion. Imports From (in millions of dollars) Exports To (in millions of dollars) Canada $232 $302 UK $115 $383 Japan $110 $210 Germany $69 $109 France $61 $116 Mexico $36 $55 In 1932, formerly free-trading Britain imposed protective tariffs and at the Ottawa Conference adopted a system of imperial preference that gave favored terms of trade 10 to countries in the British Empire-Commonwealth. The Ottawa system did not cripple U.S.-Canada trade, which began to grow again in 1934. Trade with Britain increased from 1935 as the UK started rearmament. During the Great Depression, the world economy shrank, and international trade decreased by half. As countries tried to shelter economies, they made things worse by adopting protectionist policies. Comparison of Table 2 (1928) and Table 3 (1934) indicates the extent of the contraction of U.S. international trade during the Depression. Centrally Controlled Economies The blame for the disruption of world trade in the 1930s cannot be put solely on the Depression and countries like the United States and the UK trying to protect home economies in a major recession. A new, nationalist economic model was emerging in which the state took control of economic strategy, allocated resources, and decided which industries and sectors of the economy would grow. The intention was to create selfcontained economies that were not dependent upon import and export markets. The most developed example of the centrally planned, self-sufficient, autarkic economy was the Soviet Union, which in 1928 commenced the first five-year development plan to build heavy industry and infrastructure. The Soviet model was extreme, but other European countries began to create corporatist states in which overall economic policy was directed by government to achieve national goals. Italy is an example. As Mussolini and his Fascist regime took over, the state made investments in key industries such as oil (through the nationally owned Azienda Generale Italiana Petroli, or AGIP) and automobiles. Agricultural policy encouraged the production of more wheat, at the expense of higher-value crops, to reduce food imports. Nazi Germany 11 Under Nazi rule, prices, wages, imports, and currency were controlled. State-funded autobahns and rearmament reduced unemployment. Products like rubber and aviation fuel were synthesized. Systematically, imports from western Europe and North America were cut. Trade pacts with countries in eastern Europe, the Middle East, and Latin America were paid for with Aski marks, a nonconvertible currency that could only be spent in Germany on German goods and services. The industrial empires of Krupp and Thiessen were not taken over by the state, but they—along with prominent companies including Mercedes-Benz, BMW, and Ford with a large factory in Cologne—were subject to state direction under a four-year plan adopted in 1936. The state did invest directly in enterprises, most famously in the Volkswagen plant, opened by Hitler in 1938. Japan Japan’s leaders had similar geopolitical aims to those of Germany’s: they wished to expand territory, gain control of more resources, and strive to produce a self-sufficient, government-controlled economic system. Economic policies were highly nationalistic. The Automobile Manufacturing Enterprise Act (1936) not only gave additional protection to Japanese industry but drove out foreign corporations producing in Japan, including Ford and General Motors. Large money cliques—zaibatsu—controlling industrial and commercial empires systematically reduced business with foreign corporations. The Mitsubishi zaibatsu, for example, imported raw materials to Japan in vessels built of Mitsubishi steel in Mitsubishi shipyards. The group produced motor vehicles, aircraft (including the Zero fighter), and the largest battleships used in WWII. Japan had to import raw materials, but the zaibatsu saw that few foreign vessels carried cargoes to Japan. Territorial Expansion The states striving for self-sufficiency coveted additional territory to enlarge their resource base. By 1931, Japan was taking over the coal and ores of Manchuria and in 1937 invaded eastern China. Plans were laid for “a drive to the South” to capture the oil, ores, rubber, tin, timber, and food supplies of Southeast Asia. Germany planned lebensraum (living space) in the east, and as Hitler told the Nazi party at Nuremberg in 1936, when Germany got control of the grain fields of the Ukraine, the ores of the Urals, and the forests of Siberia, Germans “would swim in plenty.” The Soviet Union, an object of Hitler’s expansion plans, wanted to retake Baltic and east European territory lost at the end of World War I. Italy, with poor natural resources, wanted control of the Mediterranean (Mare Nostrum) and an overseas colonial empire. Italy attacked Abyssinia (Ethiopia) in 1935. The League of Nations, the organization that was supposed to address global issues, failed to act decisively and lost credibility. The policies of Italy, Germany, the Soviet Union, and Japan were the antithesis of globalization. None of them wanted the free flow of goods, ideas, currency, and people. They wanted to seal off portions of world space, control people and economies using the weapons of totalitarianism, and prepare for territorial expansion. By the time the United States entered World War II in December 1941, Hitler was in control of western and central Europe and harnessing the resources and productive capacity to a fascist New Order. German armies were besieging Leningrad, threatening Moscow, and, deep in the Ukraine, pressing toward the oil resources of the Caucasus and Caspian. At the same time, Japan attacked and conquered large regions of the Pacific and Southeast Asia. 12 G.3: Post World War II—From Containment to Free-Market Competition At the end of WWII, the economic future was uncertain. British cities had been heavily bombed, and the country, having applied all resources to the war, was nearly bankrupt. The centers of all German cities had been reduced to rubble. Productive capacity had been bombed out. Japanese urban centers were destroyed, with the firebombing of Tokyo in early 1945 being particularly destructive, before the war was ended by atom bombs on Hiroshima and Nagasaki. Nazi tyranny had been destroyed, to use the language of the Atlantic Charter, the foundation document of the UN, but the totalitarian Soviet Union, with a closed, centrally controlled economy, remained. The USSR had conquered the “near abroad.” The countries of Eastern Europe, including East Germany, were in Stalin’s grasp, and the Red Army had occupation zones in Berlin and Vienna. There were fears that Communism’s march to the west was still in progress. Early in 1947, President Truman proclaimed American support for free peoples resisting subjugation by force. Aid was sent to Greece to prevent a Communist takeover. In July 1947, Kennan’s famous article on “The Sources of Soviet Conduct” appeared in Foreign Affairs, telling the strategic establishment that the Soviet Union had to be confronted and contained. In 1949, the North Atlantic Treaty was signed with a commitment to treat an attack on one member as an attack on all members of NATO. The policy of containment was in place. The United States ended the war as a superpower with a hugely increased economy and productive capacity. But with whom was the United States to trade? Certainly not the Soviet Union, which wanted a self-contained, self-sufficient, autarkic economy. Not with China where, by 1949, the Communists had defeated the Nationalists (who withdrew to Taiwan), and the Chinese mainland became a closed economic space under a regime that controlled agriculture and industry and allocated every inhabitant to a work unit from which it was impossible to move without official permission and documentation. If an unauthorized move was made, it was without papers, work, and a ration card. If U.S. international trade was to grow, it would be with Europe first. It was essential that the economies of western Europe—the UK, France, Italy, West Germany, the Netherlands, and Belgium—recover, enter into world trade, and provide markets for U.S. goods and technology. Europe: Reconciliation, Reconstruction, and Recovery 13 Perhaps because civilian populations had been bombed and deprived of necessities in every European belligerent country, there was, at war’s end, a sense of reconciliation: another terrible conflict must not be allowed to happen. For a time, France wanted to detach the Rhineland from Germany and internationalize the Ruhr industrial region, but the UK and the United States would not agree to this and in general avoided the retributive policies that had made the 1919 Treaty of Versailles with Germany “the peace to end all peace.” The United States did not repeat the mistakes made after WWI and did not withdraw its funds and influence from Europe. Reconstruction Because of the extent of the war damage, there was no shortage of work in Europe in the postwar years, and economic recovery was surprisingly rapid. By the end of 1947, industrial output had attained prewar levels, in spite of a vicious and prolonged winter during 1946–1947 that shut down much economic activity for want of power. Under the Marshall Plan, launched in 1947, the United States made dollars available to speed reconstruction. Economic growth led to imports of U.S. agricultural products and machines to reequip factories. It remained difficult for European countries to export to the United States as tariffs were high and nontariff barriers significant. The countries of Eastern Europe and the Soviet Union could have benefited from the Marshall Plan, but Stalin would not allow it. The Soviet Union understood that the Marshall Plan was not a purely charitable project. A major aim of the plan was to expand U.S. trade and make the dollar the prime currency in world trade. Integration The Marshall Plan aimed to promote European economic integration. From the perspective of U.S. business, Europe was a land of many countries, all with their own systems of tariffs and import/export regulations. A customs union, in which members adopted the same tariffs and regulations, would facilitate exports from the United States to Europe. The idea of European integration had achieved support in the 1920s but had been overwhelmed by the protectionism of the Depression, nationalism, and the rise of totalitarian regimes. 14 Many interests supported integration. Men and women wanting reconciliation saw integration as a means. Those who favored the corporate state saw the possibilities for regionwide economic planning. France got over its desire for retribution and recognized that it could play the lead part in European integration, assuming the role to which it had aspired since the empire of Napoleon. For Germany, integration was a road to reentry into the community of Europe after defeat, disgrace, and devastation in World War II. Benelux, EEC, EC, EU In 1947, Belgium, the Netherlands, and Luxembourg—small countries that depended on European trade—agreed to establish a customs union to promote the free movement of goods, capital, and people between the “Benelux” countries. This model could be expanded as a tool of European integration. Table 4: U.S. Trade Partners, 1946 Total U.S. external trade in 1946: imports $5 billion, exports $9.775 billion. Note the large increase in trade with Canada and Mexico as a result of World War II, laying the foundation for NAFTA. Imports From (in millions of dollars) Exports To (in millions of dollars) Canada $883 $1,442 UK $158 $855 Japan $81 $102 Germany $3 $83 France $63 $709 Mexico $232 $505 Source: Mitchell 1998. In 1951, France, Germany, Italy, and the Benelux countries agreed to create the European Coal and Steel Community. The ECSC was a supranational organization with the power to integrate and plan development of the coal, iron, and steel industries of the member states. 15 “The Six,” as France, Germany, Italy, and the Benelux countries were known, then moved to found the European Economic Community (EEC) under the Treaty of Rome (1957). Like the Benelux agreement, the EEC promoted the free movement of goods, capital, and people between the member states. But the EEC went further, establishing a central authority in Brussels to promote common business conditions and adopting policies like the Common Agricultural Policy (CAP). The European Economic Community eventually established a framework in which goods made in France, Germany, Italy, and the Benelux countries could move freely between members and created a large, European economic space. The EEC, while opening the markets of members to one another, protected European economic space with a Common External Tariff (CET). Goods entering the EEC paid the same tariffs whether they arrived through Hamburg, Bordeaux, Antwerp, Rotterdam, or Genoa. Many U.S. and Canadian multinational companies invested in productive capacity in the territory of an EEC member to get inside the CET and gain access to the enlarged European market. Thus the creation of the EEC stimulated foreign investment. With the general lowering of tariffs under GATT (General Agreement on Tariffs and Trade) and, since 1994, the creation of the World Trade Organization, the Common External Tariff has been reduced as an impediment to trade. When the United States and the EU have a dispute, it is often over a nontariff barrier to trade. For example, the EU does not allow the import of many genetically modified crops. An example of a U.S. nontariff barrier is the exclusion of Spanish hams on health grounds. The EEC Common Agricultural Policy, was, and is, a hindrance to world trade. Under the policy, the EEC’s central authority in Brussels pays farmers guaranteed prices, well above world prices, to produce agricultural products and reduce food imports. The CAP did make Europe more self-sufficient in food production, but the food is high-priced. When cheap agricultural products arrive from Canada, the United States, Australia, and developing countries, tariffs are placed on imports to bring their price up to the EEC (now EU) guaranteed price. Many developing countries feel the CAP prevents them from selling in European markets. The United States is also criticized for its agricultural policies, not for tariffs but for subsidies to producers that allow the United States to be a major agricultural exporter into markets that developing nations might supply. EC/EU Expansion The EC/EU enlarged in the following steps: Denmark, Ireland, UK (1973); Greece (1981); Spain and Portugal (1986); Austria, Finland, and Sweden (1995); and then, in 2004, 10 countries were accepted, bringing membership to 25. The new members included former Communist states that had experienced centrally planned economies: Estonia, Latvia, Lithuania, Poland, the Czech Republic, Hungary, Slovakia, and Slovenia together with Malta and the Greek portion of Cyprus. The EU expansion greatly increased the scope of the free-market, competitive, capitalist world and added to world trade. Bulgaria, Romania, and Turkey are currently negotiating entry. 16 The Soviet Sphere After World War II, the Soviet Union had a large task of reconstruction, particularly in the western part of the country, which had been fought over and devastated twice—once when the Wehrmacht invaded and again when the Red Army regained territory. Both sides destroyed economic infrastructure as they retreated. The Soviet Union established a Communist-bloc trade zone with the creation of the Council for Mutual Economic Assistance (COMECON) in 1949. The organization allowed the USSR to control many aspects of trade in Eastern Europe and was used to produce a common economic policy for the region. Trouble developed in the 1960s when plans called for some Eastern European countries to develop manufacturing and others to be sources of agricultural commodities and mineral raw materials. Romania, with a rich resource base, objected to being classified as a producer of raw materials and denied the opportunity to industrialize. COMECON was not an effective organization to promote regional economic development, but it was an instrument that kept goods from the rest of the world out of Eastern Europe. COMECON was disbanded in January 1991. As we have seen, many former members, other than Russia, moved to join the EU. The Americas In 1934, the United States passed the Reciprocal Trade Agreements Act and under Secretary of State Cordell Hull began the process of liberalizing world trade. A major problem with the 1934 act was that it involved negotiations with many trade partners, and each negotiation developed its own issues. Toward the end of World War II, an agreement negotiated at Bretton Woods (1944) laid the foundation for a World Bank and the International Monetary Fund, but no global trade organization was established. In March 1947 at Baylor University, when President Truman spoke on international economic policy, the president reiterated that the United States was prepared to enter into reciprocal agreements. However, in the same year, many countries signed the General Agreement on Tariffs and Trade. GATT adopted the principle of nondiscrimination: if a country entered into a trade deal with another country, automatically those terms would be offered to all signitaries to GATT. The process of trade liberalization was speeded up by rounds of negotiations, the most famous of which was the Kennedy Round, culminating in an agreement between the United States, Japan, the UK, and the European Economic Community to reduce tariffs. Later rounds of negotiation continued to reduce tariffs and other impediments to trade. In 1994, the World Trade Organization was established. 17 The WTO could rule on disputes and had enforcement mechanisms. For example, the EU protested to the WTO that high tariffs imposed by the United States on incoming European steel breached the rules. The WTO sided with Europe, which was allowed, if it wished, to impose tariffs on U.S. goods to cover losses on steel exports to the United States. The steel incident illustrates the complexity of U.S. trade policy. The State Department understands that as the United States has the largest economy, it has to give the lead in promoting global economic interaction if the world economy is to grow. At the state and local levels, economic hardship, brought on by the closure of industries exposed to cheaper imports, can result in political pressure being applied to get protectionist measures (higher tariffs) or quotas on imports or agreement with the import source to slow the rate of U.S. market penetration. Usually there is a degree of balance between those in the administration wanting to liberalize world trade and those who lobby for protection. Obviously, the balance broke down in the Depression, when the HawleySmoot Tariff Act helped reduce trade. NAFTA (Entered into force January 1, 1994) During World War II, of necessity, hemispheric trade increased rapidly. In particular, there was integration of vehicle and aeronautical manufacturing between the United States and Canada. Under the bracero program, commencing in 1942, large numbers of Mexican men entered the U.S. labor market—as the wartime economy was expanding rapidly. After the war, in Latin America generally, countries adopted nationalistic economic policies, discouraged foreign ownership of businesses, and placed restrictions on investment by noncitizens. Policies of import substitution industrialization were widely adopted. Under Import Substitution Industrialization (ISI), high tariffs were placed on manufactured imports and protectionist incentives given to local investors to start or expand factories to make goods for the national market. The policy was good news for American manufacturers of industrial equipment, bad news for those who exported consumer goods to Latin America, and terrible news for consumers in the region who got high-priced, homemade, generally poor-quality consumer products. 18 In 1964 the bracero program was terminated, and the government of Mexico looked for new forms of interaction along its northern border with the largest economy in the world. The Border Industrialization Program was started in 1965. The program reduced some nationalistic economic policies. Foreign corporations could invest in assembly plants in and around northern border towns and bring in manufacturing equipment and key personnel to establish factories specifically designed to supply the U.S. market. The United States only imposed tariffs on the value added in the assembly plants. Thus if components were imported from the United States, then assembled in a maquiladora plant and exported to the United States, tariffs were not charged on the total value of the product. For example, a consumer product crossing from a maquila into the United States has a total value, at the border, of $10. However, the U.S. components in the product are worth $5. Duty is only charged, by U.S. customs, on the $5 of value added in Mexico. By the 1960s and 1970s, large quantities of consumer goods were being imported into the United States from Japan, Taiwan, and Hong Kong. Many saw the advantages of stimulating economic activity on the border with Mexico, with its trickle-over effects on U.S. border towns. Thousands of maquilas were established before NAFTA (North American Free Trade Agreement). Trade between the U.S. and Canada had grown strongly during and after World War II. There were strong economic linkages in some areas, for example, between Seattle and Vancouver, while Detroit and Windsor, Ontario, had an integrated motor manufacturing region. A complicated free trade pact was signed by the United States and Canada in 1989. When the United States started to negotiate free trade with Mexico, Canada suggested a treaty involving the three countries. NAFTA was signed in 1993, entered into force in 1994, and has generally been a mechanism that has opened up Mexican markets to U.S. service industries, including banking and retailing. Agricultural exports have increased to Mexico. Although Pemex (Petróleos Mexicanos) remains the monopolistic national oil corporation, U.S. oil industry service companies are increasingly active in Mexico. As China became a favored place for cheap labor and manufacturing, growth of traditional maquilas slowed, but more elaborate manufacturing activities in the border zone are helping promote employment growth again. A free trade agreement like NAFTA is different from a customs union. In a free trade agreement, the members simply agree to remove, over time, tariffs on goods moving between them, where the goods originate in the territory of member states. In a free trade association, there is no common external tariff, and members can make trade agreements with other countries without reference to the states in the free trade association. Since helping create NAFTA, the United States has signed trade agreements with Chile and Central America. Canada and Mexico did not have to approve these agreements. However, Chilean goods cannot be exported from the United States to Canada and Mexico under NAFTA terms. 19 Many want to see the creation of a free trade association of the Americas. Creating hemispheric free trade will not be easy. Organizations like Mercosur—the Southern Common Market (1991)—already exist with Argentina, Brazil, Paraguay, and Uruguay as members. Mercosur does have protective common external tariffs, and all Mercosur members would have to agree to remove these on goods entering from the countries of the Americas to create a hemispheric free trade area. Collapse of the Soviet Union Before the Soviet Union had been created, the British geographer Halford Mackinder predicted that if one power, or alliance, came to control the closed “Heartland of EuroAsia,”—what Mackinder called the “geographical pivot of history,”—the “empire of the world would then be in sight.”1 Mackinder went on to say that the heartland region would cut itself off, economically, from the maritime world and become self-sufficient. And that is what happened. When Stalin took power of the Soviet Union, he initiated a series of five-year plans, starting in 1928, that made the USSR a major industrial power and developed the resources of the Volga, Urals, and Siberian regions. There was little trade with other countries. The development of industrial regions away from Leningrad, Moscow, and the Ukraine allowed the Soviet Union to go on fighting after it was badly defeated in the west by invading German armies in the summer of 1941. German generals were surprised to find that the supposedly backward Soviets were building tanks and artillery capable of taking on Panzer divisions. The Soviets won their “Great Patriotic War” and took over all of Eastern Europe together with East Germany, imposing Communist regimes and centrally planned economies on the region. The Soviet Union, via the Council for Mutual Economic Assistance (COMECON), exerted economic control over Eastern Europe. COMECON promoted some trade between members, but currency restrictions made it difficult for non-COMECON countries to sell goods into Eastern Europe, although Poland, Czechoslovakia, and Hungary did export to the west. The collapse of the Communist regimes in the Soviet Union and Eastern Europe in the early 1990s opened up a number of countries to democracy, capital investment, and world trade. By 2004, the Baltic states, Czech Republic, Poland, Hungary, Slovenia, and Slovakia had joined the EU and begun to integrate into a European economic system that promoted the free movement of goods, people, and capital. Russia, Belarus, Ukraine, and other former Soviet Socialist Republics still struggle to make the transition to democracy and an economic system not tied to central planning authorities. 20 China China illustrates the prospects and problems of globalization. On the one hand, a large, cheap labor pool is making low-cost consumer goods available to North America and elsewhere, helping to reduce living costs and promoting consumer spending and economic expansion. In China, waged work has allowed living standards, for part of the population, to rise, and demand has been created for consumer goods. Economic diversification is advancing in China. On the debit side, many existing patterns have been disrupted. As the manufacturing sector has grown, there has been a large increase in demand for energy and raw materials. Hydroelectric power dams are being built on the Yangtze River gorges to increase energy supplies. Rural inhabitants are being forced from houses and fields as lakes fill behind the dams. In major cities, like Shanghai and Guangzhou, urban redevelopment is erasing the housing of the poor as apartments and commercial buildings are erected to supply new economic demands. Such disruptive forces of globalization are common. China is not an open, free-market society. The Communists still control the economy to insure that exports thrive and imports are limited. The exchange rate of the yuan is kept artificially low to make exports attractive and imports expensive. China and a number of Asian countries, including Thailand, Indonesia, and Pakistan, illustrate other aspects of the globalization debate. In the Western world, those campaigning for trade liberalization in the nineteenth century also wanted the abolition of slavery, restrictions on child labor, and safety in the workplace. Many past victories in the Western world concerning restrictions on working hours, the insistence that children go to school and not the factory, and protection of environments have been outflanked by moving manufacturing to unregulated regions where inhabitants cannot resist exploitation. Time-Space Compression The globalization of economies is not only about political openings and freer trade agreements. Technology has allowed a widening of economic interaction by cheapening the cost of moving goods and information. Once upon a time we had the friction of distance and transport costs. Transport costs added significantly to the cost of goods and made it uneconomic to make many 21 products in distant places with low labor costs for sale in the markets of North America and Europe. Transport costs still exist, but they have been dramatically reduced over air, land, and sea. Ports used to employ thousands of workers—dockers and longshoremen—who lifted arriving cargoes out of the holds of ships onto trucks and rail cars for transport to warehouses. Similarly, before a ship left port, dockers put goods into nets for cranes to lift onto ships, where more men stowed the cargo and battened down the hatches. The labor costs were enormous before breakages, wastages, and pilfering were added to the accounts. In addition, ships sat at the docks for days or weeks while cargoes were loaded and unloaded. The capital depreciation on a ship is large, and costs are incurred on a daily basis whether or not the crew is sailing the ship. Then came containers. Containers are a simple device: a large box, packed at the point of production, that can fit on a truck or railroad car. At dockside, containers are lifted rapidly, by crane, from shore to ship and from ship to shore at the port of destination. Now ships could dock and unload rapidly, reducing the number of idle, depreciating days. Dock labor costs fell dramatically as ship design and dock work practices altered to accommodate fast-moving containers. The container is an organizational change, not a technological breakthrough. Containers could have moved on railroad cars to dockside cranes in the nineteenth century. Why they did not do so, until well after WWII, is a discussion point. Clearly the attitudes of labor and unions are involved. Many dockers lost jobs as a result of the changes. The movement of information, including bids and orders, has involved major technological breakthroughs. In the sixteenth century, it took the Council of the Indies in Spain seven months to send a message and receive a reply from the viceroy of New Spain in Mexico City, if the viceroy replied promptly. During the eighteenth century, it was possible, in good conditions, to exchange a message and response between Boston and Bristol in two to three months. Questions and clarifications involved another sailing, back and forth, between the ports. In the late nineteenth century and early twentieth centuries, the telegraph and telephone, after transoceanic cables were laid, speeded information transfers but were not cheap. Today with email, information, bids, orders, questions, and clarifications can be dealt with rapidly, provided executives make prompt decisions. The impact of rapid information movement allows production to quickly orient to demand in markets. Large distribution networks involving warehouses filled with expensive inventories of goods have been replaced by “just in time” delivery systems. 22 As a result of changes in communication technology, goods move more rapidly and cheaply than could have been imagined a few decades ago. We wonder how it is economic to transport cantaloupes from Guatemala, cucumbers from hothouses in Holland, plant pots from Italy, salmon from Scotland, and a large range of basic, heavy products from China. Tourism Tourism is a worldwide industry central to the process of globalization. As a result of overseas travel, citizens of many countries have developed new appetites, adopted new fashions, heard different music, and encountered, firsthand, many formerly foreign cultural traits. Tourism requires resorts, hotels, shopping areas, and quays for cruise liners. Providing facilities stimulates economic growth. On the debit side, tourism overtaxes environments, distorts local lifestyles, and can often result in dual economies where those serving tourist enclaves are separated from those living traditional lifestyles. Summary The whole history of globalization has been marked by disruption, as the indigenous population of Hispaniola learnt in a few years after 1492, for within two decades there were only a few hundred native inhabitants left on the island. Yet the development of the world economy is a result of linking regions and resources. There will be no conclusion to the debate on the problems, costs, and benefits of globalization. The development of the global economy is seen as a contest between those who want to open economic space to intervention and competition—the free traders—and those who wish to close and protect territory—the protectionists. The struggle between the contestants reached an apex in the Cold War when the Soviet Union wanted to create a self-contained economic region centrally planned under Marxist principles, and the Western countries worked to establish free trade on a global basis. With the establishment of the WTO in 1994, the contest appeared to be over. However, we should be cautious in viewing the future. First, large economic spaces—Russia and Communist China—are not fully open to international trade. Second, the expansion of world trade depends upon the expansion of economies. In Japan and several major European economies, growth is slow. The United States, with healthy economic growth, propels the world economy and world trade but each year incurs a larger and larger deficit in international trade. Should the trade imbalances become unsustainable, the United States might be forced to reduce imports and adopt measures that reverse or slow the commitment to free trade. 23