GPCO 410 Globalization

What is the principle of non-discrimination in the WTO?

The principle of non-discrimination in the WTO refers to two key concepts: Most-Favored-Nation (MFN) treatment, which mandates that any trade advantage granted to one member must be extended to all WTO members, and National Treatment, which requires that foreign goods and services be treated no less favorably than domestically produced counterparts once they enter the market.

What is Globalization? The Three-Part Definition

Increasing economic exchange across political and physical borders
• Once limited to physical goods and labor, now includes services, finance, and intellectual property
• Local & national markets are more integrated
• Prices shift across borders simultaneously and tend to converge
• These price trends reshape economic structures
• Example: wage changes in one country influence costs and prices in another — visible today in tariffs
• Large- Scale, transnational organizations
• Multinational corporations
• International organizations – World Bank, IMF
• NGOs

The Long Arc of Globalization 1870-1914

Main Features: First modern wave of integration;migration and capital flows at historic highs

Drivers: Industrial revolution, steamships, gold standard 

Lessons: Market integration requires stable monetary and political systems 

The Long Arc of Globalization 1919-1939 

Main Features: collapse after WWI and the great depression s

Drivers: Smoot hawley tariffs, autarky, financial panic

Lessons: Weak leadership and protectionism destroy cooperation 

Types of flows and Transactions

1. Services: Tourism, Transport, Accounting, Architecture, Movies/Music, ...
2. Foreign Direct Investment (FDI): Investment goods (factories, mines,
equipment, IP) financed & controlled by foreign entities.
3. Finance: insurance, loans, and portfolio investment.
4. People: migration

The Long Arc of Globalization 1945-1975

Main Features: Rebuilding through Bretton Woods system

Drivers : U.S. leadership, fixed exchange rates, IMF and World Bank

Lessons:Managed globalization stabilizes capitalism

The Long Arc of Globalization 2008-Present

Main Features:Slowdown and partial fragmentation

Drivers: U.S.–China rivalry, financial crises, regionalization

Lessons: Globalization persists but becomes more contested

Globalization Theories Hegemonic

Hegemonic Stability Theory (Kindleberger, 1973; Gilpin, 1973)

A stable global economy requires a hegemon — a dominant power large enough to benefit from, and enforce,

stability.

• The hegemon provides global “public goods”:

• Stable currency and financial system

• Open trade and security guarantees

• Leadership in crises (e.g., U.S. after 1945)

• When the hegemon declines, global cooperation weakens → instability and fragmentation.

Alignment-Based Globalization Theory

Countries differ in policy preferences — regulation, governance, alliances, etc.

• Globalization grows when policies are aligned, reducing barriers and “border effects.”

• Hegemons drive alignment through treaties, trade blocs, and institutions.

• In unipolar systems, globalization flourishes (shared rules).

• In multipolar systems, outcomes depend on rising powers’ preferences — may reinforce or fragment the system.

The Bretton Woods Order 

Origins: Postwar leaders designed a system to prevent another Great Depression and rebuild trust in

trade and finance.

Bretton woods conference established world bank and international monetary fund

Institutions and Roles:

• IMF: Stabilize exchange rates, provide short-term financing.

• World Bank: Fund reconstruction and development projects.

• GATT/WTO: Lower tariffs and resolve trade disputes multilaterally.

U.S. Role: Supplied liquidity and markets, tied the dollar to gold ($35/oz), and became the anchor of

the system.

Collapse in the 1970s: The Nixon Shock ended convertibility, creating floating rates and a shift

toward financial globalization.

Legacy: Multilateral institutions remain central but face new legitimacy and power challenges as

emerging economies gain weight.

Factor Endowments

Definition: The stock of productive inputs—land, labor, capital, and human capital—available to

an economy.

• Endowments change over time: Investment in education, innovation, and infrastructure can alter a

country’s trade profile.

Comparative Advantage:

the ability of a country, company, or individual to produce a good or service at a
lower opportunity cost than another.
• Countries export goods that use their abundant factors intensively.
• Labor-abundant : textiles, agriculture.
• Capital- and skill-abundant : machinery, technology.
• Factor Intensity: How much each good relies on different inputs.
• Example: Apparel (labor-intensive), microchips (capital- and skill-intensive).

Winners and Losers:

Winners: sectors using abundant factors (exporters).

Losers: sectors using scarce factors (import-competing industries)

Protectionism

Benefits concentrated groups while spreading costs among consumers.

Collective Action

Small groups with large stakes organize easily (farm lobbies, steel unions).

• Large groups with diffuse benefits rarely mobilize.

• Trade policy outcomes reflect organization and politics, not efficiency alone.

Rules of Nondiscrimination

From GATT to WTO: The 1947 GATT established rules for non-discrimination and reciprocity. The

1995 WTO expanded this into a formal institution covering goods, services, and intellectual

property.

• Core Principles:

• Most-Favored Nation: equal treatment across partners.

• National Treatment: imported goods treated the same as domestic ones.

• Reciprocity and transparency ensure balanced liberalization

Challenges: Consensus decision-making, unequal power, and limited enforcement capacity

create deadlocks (e.g., Doha Round).

• Big takeaway: Multilateralism lowers transaction costs but depends on trust and leadership.

The Uruguay Round “Grand Bargain

Developing countries gained market access; developed countries gained IP and service protections

Firms as Engines of Globalization- Why firms Exist

Why firms exist: To reduce transaction costs and internalize production when markets are

inefficient.

Core competencies: The unique strengths, skills, and capabilities that give an organization a

competitive advantage.

• Innovation, brand design, logistics

Types of FDI:

Horizontal : duplicates what a firm is doing in another country to access new market

Substitute for international trade

Vertical : splits production stages across countries to exploit cost differences

Complement to international trade

Example of foxconn and apple,

Credibility and Risk for firms

Once capital is sunk, governments may alter taxes or regulations (the “obsolescing bargain”).

• Firms manage this risk with bilateral investment treaties, investor–state arbitration (ICSID), and global

reputation.

The Obsolescing Bargain

Definition: When the bargaining power shifts from the

multinational to the host government after FDI is

committed.

• The host can change laws, expropriate, or impose new

taxes once the firm’s assets are immobile.

Stages

• Host offers concessions to attract FDI.

• Firm invests—creating sunk costs.

• Host tightens regulation or seizes control (“expropriation”).

Examples

• Carlsberg in Russia: assets seized by Kremlin.

• Próspera in Honduras: government reversed ZEDE law.

Global Production Networks and Value Chains

Definition: Interconnected production stages spanning multiple countries.

• Logic: Each country contributes where it has cost or skill advantages.

• Firm behavior:

• Keep high-value tasks (R&D, design, branding).

• Outsource low-value, labor-intensive stages (assembly, logistics).

• Country strategies:

• Bangladesh: entry through apparel assembly.

• Vietnam and Mexico: electronics and auto components.

• South Korea: moved from assembly to innovation and exports of technology.

• Policy challenge: Capturing more value through skills, innovation, and infrastructure while staying

open to trade and FDI.

Why Market integration matters

A. Quantities: The Structure of Economies and of Political Power Shifts:

Increasing integration of markets results in a reallocation of economicactivities across and within countries

B. Relative Prices of Goods in the Home Countries Change as Well.

For example, the price of manufactured goods has declined in relative terms (in the US). In response, the size of the domestic manufacturing sector has declined.

Prices of services, relatively, have remained high, and the size of the service

C. The Prices People receive for their Labor and Assets Changes:

The real source of concern over globalization is that one of the most important prices in

the economy is the price of labor.

Complete globalization implies that (eventually) the same quality of labor—labor with the

same skill level—should receive the same wage anywhere in the world.sector has increased.

Globalization Crises

20 years of strain on the institutional foundations of Globalization

A short list of recent crises includes:

1. Global Financial Crisis (2008-2010)

2. Eurozone Debt Crisis

3. Refugee Crisis in Europe

4. U.S. – China Trade War (2018- )

5. COVID-19 Pandemic and Economic Recession (2020-23)

6. Russian Invasion of Ukraine and Destabilization of Global Energy Markets

7. Israel-Gaza War (2023- )

Global Politics for a Globalized Economy

(Dervis & Conroy 2018)

Markets Outpace Borders

• Capital, talent, and supply chains now allocate globally, limiting the reach of purely national policy.

•Legitimacy Gap

• WTO/IMF-style bodies shape rules, but voters see them as distant and elitist → populist backlash.

•Rodrik’s Trilemma

• Deep globalization, national sovereignty, and full democracy can’t all coexist; choices are inevitable.

•Regulatory Divergence

• U.S. leans unilateral/protectionist; EU uses market size to export rules (GDPR, antitrust).

•Needed Reforms

• Stronger, more democratic global institutions (e.g., global competition & tax authorities) and local leaders

who can explain global-rule benefits at home.

The Middle Income Trap

any developing economies grow quickly in their early stages of industrialization.

• This growth is driven by large investments, cheap labor, and the reallocation of workers from agriculture

into higher-productivity sectors.

• Eventually, these easy gains diminish as wages rise and productivity growth slows.

• During the 1980s and 1990s, several countries entered long periods of slower expansion after

reaching middle-income levels.

• Their industries became less competitive, and upgrading toward innovation-based growth proved

difficult.

• Scholars labeled this dynamic the “middle income trap.”

• Yet, in the 2000s, a different trend emerged.

• Many middle-income economies experienced renewed growth, improved macroeconomic

management, and deeper participation in global markets.

• Their performance often matched or exceeded that of low- and high-income groups.

(not proven to exist)

Early growth ( Larson reading) 

Early growth comes from cheap labor, basic tech adoption, and shifting labor from low- to high-

productivity sectors.

• As rural labor shrinks and wages rise, factor accumulation loses steam.

• Countries risk being “squeezed”:

• Too expensive to compete with low-wage economies

• Not advanced enough to compete with high-income economies

Debate: Some evidence questions if the “trap” exists; many countries continue to see steady per

capita income growth.

Migration: Global Income inequality 

Massive Global Inequality in Wages

• A worker’s productivity (and wage) depends more on where they work than on who they are.

• The same person doing the same job earns 5–10× more in a rich country than in a poor one.

• This wage gap reflects differences in institutions, infrastructure, and capital, not individual skill.

Trillion-Dollar Opportunity

Michael Clemens (NBER): allowing just 5% of workers from developing countries to move could raise world GDP

by 50–100% — more than removing all remaining trade and investment barriers combined.

• Migration reallocates labor from low-productivity to high-productivity environments → creates global efficiency

gains.

why people move 

These enormous income differences create powerful incentives for migration.

• The chart below (Branko Milanovic) shows how even middle-income workers in India or Brazil rank far below low-

income workers in the U.S. globally — explaining the economic pull of migration.

• Migration isn’t just a social issue — it’s one of the most powerful engines of global growth. The barriers keeping

workers in poor countries trap trillions in lost income and productivity.

Demographic imbalances: Diverging Population Trends

Advanced economies (Japan, Italy, Germany) face rapid population aging and shrinking workforces.
• Developing regions (Africa, South Asia) are experiencing youth booms, adding hundreds of millions of new workers.

Demographic imbalances: Economic pressures in advanced economies

Fewer workers mean slower growth, lower productivity, and falling tax bases.

• More retirees mean rising costs for pensions, healthcare, and welfare systems.

• Example: Japan’s working-age population has fallen by over 10 million since 2000, straining fiscal sustainability.

demographic imbalances: migration as a pressure valve

Labor mobility can rebalance global demographics: young workers from developing countries fill labor gaps in

aging societies.

• Without migration, rich countries may face existential fiscal crises as dependency ratios soar

More income More migration (to a point)

Migration Increases with Development

• The poorest people usually can’t afford to migrate — it’s costly to move.

• As income rises, aspirations and resources to migrate increase.

• People begin seeking better opportunities abroad, especially young, educated workers

The Migration Hump

The “Migration Hump”

• Emigration rates rise sharply as countries move from low to middle income (≈ $2,000 – $8,000 per capita).

• Beyond this point, as wages and local opportunities improve, emigration declines.

• Example:

• Mexico (1990s) → High migration peak.

• Now, as income rose, net migration to the U.S. has fallen.

• Economic development initially fuels migration — it doesn’t stop it.

Only when countries reach higher levels of income and stability does migration slow naturally.