Globalization is the process of international integration arising from the interchange of world views, products, ideas and mutual sharing, and other aspects of culture. Advances in transportation, such as the steam locomotive, steamship, jet engine, container ships, and in telecommunications infrastructure, including the rise of the telegraph and its modern offspring, the Internet, and mobile phones, have been major factors in globalization, generating further interdependence of economic and cultural activities.
Following the Commission’s White Paper on the Future of Europe, the Commission is publishing today its Reflection Paper on Harnessing Globalization.
Based on a fair assessment of the benefits and downsides of globalization, today’s Paper aims to launch a debate on how the EU and its Member States can shape globalization in a way that anticipates the future and improves the lives of Europeans.
Though scholars place the origins of globalization in modern times, others trace its history long before the European Age of Discovery and voyages to the New World. Some even trace the origins to the third millennium BCE. Large-scale globalization began in the 19th century. In the late 19th century and early 20th century, the connectivity of the world’s economies and cultures grew very quickly.
The concept of globalization is a very recent term, only establishing its current meaning in the 1970s, which ’emerged from the intersection of four interrelated sets of “communities of practice”: academics, journalists, publishers/editors, and librarians. In 2000, the International Monetary Fund (IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people, and the dissemination of knowledge. Further, environmental challenges such as global warming, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalization. Globalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment.
The world is becoming ungovernable. Kleptocrats have found themselves unemployed, because the economy has become global while governments remain national. Transnational companies reduce racism, because you cannot be global and racist, and encourage anarchy, because national governments become powerless.
Frans Timmermans, First Vice-President of the Commission, said: “Globalisation is good for the European economy overall, but this means little to our citizens if the benefits are not shared fairly and more evenly. Europe must help rewrite the global rulebook so that free trade becomes fair trade. So that globalisation becomes sustainable and works for all Europeans. At the same time, we must focus our policies on getting people the education and skills they need to keep up with the evolution of our economies. Better redistribution will help guarantee the social cohesion and solidarity this Union is based on.“
The current resurgence of populist nationalism in the United States and Europe reflects the pushback against these long-held dogmas of transnationalism, and resistance to the denigration of national identities. Populist nationalism has deep and wide support. Resistance is very widespread and vigorous. Facing global threats from rivals and enemies passionate about their own national identities, the interests and security of Occident will be better protected if its citizens are allowed to express without recriminations their autonomy.
Globalization has fallen into disrepute. More and more people are rejecting it outright as unfair and as a source of all sorts of evil — including economic crises and migration.
This kind of blanket condemnation of globalization however is a huge problem. The reason for this becomes apparent if one considers the fact that globalization has two dimensions, an economic and a political one.
Economic globalization is synonymous with the cross-border division of labor. Today, no country produces solely to satisfy its own needs, but instead also for producers and consumers in other countries. And each country makes what it knows best, relatively speaking.
Economic globalization, with free trade being a natural component, increases productivity. Without it, the poverty on this planet would not have been reduced to the extent it has been over the past decades.
From the very outset, political globalization has nothing to do with economic globalization. It aims to direct and determine all relations between people on the various continents by way of authoritarian rule. The decision about what is being produced and consumed as well as where and at what time isn’t to be found by the free market, the division of labor and free trade, but instead by an ideological-political creative force.
The core argument of political globalization is that coping with ever more complex problems of this world — ranging from economic crises to the protection of the environment — requires a central decision-making process. The nation state — as a sovereign representative of people — has become obsolete and needs to be replaced by a globally active political power.
Of course, the thinking behind this opinion is purely socialist-collectivist.
It is also the basis of the European Union (EU). Ultimately, it aims to create a European super state, in which nation states will dissolve like sugar cubes in a hot cup of tea.
For the foreseeable future, this dream has come to an end. The desire to realize uniformity has foundered amid hard political and economic realities. The EU is undergoing radical change — at the very last following the British decision to leave the EU — and may even be about to break up.
Jyrki Katainen, Vice-President for Jobs, Growth, Investment and Competitiveness, said: “Globalisation is a formidable force bringing benefits to Europe and the rest of the world but also many challenges. To preserve the benefits of openness but also address its drawbacks, Europe must promote a stronger rules-based global order, act resolutely against unfair practices, make our societies more resilient and our economies more competitive in the face of a fast changing environment.“
The reflection paper takes an honest look at what globalisation has brought to the EU. The fact is that, even if the EU has greatly benefitted from globalisation, it has also brought many challenges. Around the world, globalisation has helped lift hundreds of millions of people out of poverty and enabled poorer countries to catch up. For the EU, global trade has boosted EU economic growth, with every €1 billion of additional exports supporting 14,000 jobs. Cheaper imports also benefit poorer households in particular. But these benefits are not automatic nor are they evenly distributed among our citizens. Europe is also impacted by the fact that other countries do not all share the same standards in areas such as employment, environmental or safety standards, meaning that European companies are less able to compete on price alone with their foreign counterparts; this can lead to factory closures, job losses or downward pressure on workers’ pay and conditions.
However, the solution lies neither in protectionism nor in laissez-faire politics. The evidence presented in the Reflection Paper shows clearly that globalisation can be beneficial where it is properly harnessed. The EU must ensure a better distribution of the benefits of globalisation by working together with Member States and regions as well as with international partners and other stakeholders. We should seize together the opportunity to shape globalisation in line with our own values and interests.
Today’s Reflection Paper opens up a vital debate on how the EU can best harness globalisation and respond to its opportunities and challenges:
- On the external front, the paper focuses on the need to shape a truly sustainable global order, based on shared rules and a common agenda. The EU has always stood for a strong and effective ‘multilateral’ global rulebook and should continue to develop it in a way that addresses new challenges and ensures effective enforcement. For example, the EU could push for new rules to create a level-playing field by addressing harmful and unfair behaviour like tax evasion, government subsidies or social dumping. Effective trade defence instruments and a multilateral investment court could also help the EU act decisively against countries or companies that engage in unfair practices.
- On the domestic front, the paper suggests tools to protect and empower citizens through robust social policies and providing the necessary education and training support throughout their lives. Progressive tax policies, investing in innovation and strong welfare policies could all help redistribute wealth more fairly. Meanwhile, use of EU structural funds to assist vulnerable regions and the EU Globalisation Adjustment Fund (see Factsheet on the EU Globalisation Adjustment Fund) to help displaced workers find another job can help mitigate negative impacts.
Around a third of our national income comes from trade with the rest of the world. As overseas markets have grown, European exports have grown supporting higher-paid jobs. By specializing in what they do best, countries can produce more for less, boosting consumers’ purchasing power. People travel, work, learn and live freely in different countries. They interact with each other on the web, sharing their ideas, cultures and experiences. Students have online access to courses run by leading universities across the world. International competition and scientific cooperation have accelerated innovation. Globalization has also lifted hundreds of millions of people out of poverty and enabled poorer countries to catch up.
But globalisation also brings challenges. Many Europeans are concerned that globalisation leads to inequality, job losses, social injustice, or lowering environmental, health or privacy standards. They sometimes also feel threatened in their identities, traditions and ways of living. These concerns must be recognised and addressed.
Harnessing globalisation, shaping the world for the better, promoting high standards and values outside Europe, protecting our citizens from unfair practices, and making our societies resilient and our economies more competitive are all key priorities for this Commission.
With Donald J. Trump taking over as president of the US there is no longer any intellectual support by the US for the European unification project. The change of power and direction in Washington has ousted the political globalizers — which gives hope that the future US foreign policy will be less aggressive in military terms. President Trump — unlike his predecessors — doesn’t strive to enforce a new world order. But at the same time, it is the economic globalizers who are concerned.
And that’s understandable. The Trump administration fancies the use of protectionist measures — be it in the shape of import duties or tax discrimination — to boost production and employment in the US, to the detriment of other countries if need be.
Such an interference with economic globalization and the turning back of the clock wouldn’t just infringe on prosperity. It would probably also rekindle old and new political conflicts. But, it doesn’t have to be that way.
With the planned gigantic easing of the tax burden — to the tune of $9.5 trillion — President Trump may be able to generate such a positive economic dynamic that all the backward-looking protectionist electoral promises will disappear in a drawer. And that would be most desirable: Globalization — the voluntary division of labor and free trade — promotes a productive and, what’s more, peaceful cooperation across borders. And that’s why it is important to preserve economic globalization.
We see four major geopolitical shifts underway.
First, protectionism is growing. The US, Russia, and India have each introduced more than 500 discriminatory trade measures since 2009. Global Trade Alert reports that in 2016 alone more than 500 discriminatory measures and only 300 liberalizing measures were introduced worldwide.
Second, the ability of multilateral institutions to establish and enforce shared rules seems to be weakening. Bilateral agreements based on national interests are taking precedence over multilateralism.
Third, the dominant role of Western countries in the multilateral financial institutions that have provided global capital appears to be receding as new financial institutions emerge, such as the China- backed Asian Infrastructure Investment Bank and the New Development Bank.
Fourth, state capitalism is on the rise: examples include the growing economic role of state-owned enterprises and sovereign wealth funds and the increased direct government support of domestic industries. Sovereign wealth funds now manage portfolios valued at $7.3 trillion, compared with the $4.2 trillion in assets under management by closed-end private funds, according to the financial market research firm Preqin.
Equally profound are the structural shifts in the world economy that have been set in motion by digitalization. We see three forces at work:
- Industry 4.0. In addition to boosting productivity by as much as 30% and reducing labor costs, advanced digital manufacturing systems let businesses alter their global production and delivery footprints by making it feasible to operate smaller, more flexible facilities closer to customers around the world instead of concentrating production in large plants in countries with low labor costs.
- Digital Platforms. Both traditional companies such as General Electric, with its Predix platform, and relative newcomers such as Uber, Airbnb, and India’s Flipkart are gaining access to borderless global markets through their information technology platforms and ecosystems of local partners. In the period from 2012 to 2015, some platform-based companies grew at a rate in excess of 100%, compared with single-digit growth at established multinational companies.
- Digital Services. Advances in digital technologies and platforms are enabling the rapid growth of cross-border digital services such as online travel booking, entertainment sites, and asset performance improvement services. New value-added services are becoming a key generator of value and revenue growth for traditional businesses.
Together, these geopolitical and digital shifts are redefining the economic, business, and political models of the old globalization framework, giving rise to a very different paradigm.
- The New Economic Model. The global economy is becoming fragmented and multipolar, with more countries driving global growth. In emerging markets, economic growth rates, development models, and the chief sources of growth—such as manufacturing, services, and consumption—are diverging. Flatter growth in merchandise trade will continue to translate into lower growth in global GDP, at least in the short to medium term.
- The New Business Model. Because growth in trade, especially merchandise trade, and in cross-border investment is slowing as a result of rising protectionism, shifts in global manufacturing costs, and the economics of Industry 4.0 technologies, companies must find new drivers of global growth. These forces are also decentralizing global supply chains, while growth in digital services and platforms is integrating many parts of businesses and the ecosystems in which they operate.
- The New Political Model. As the influence of the world’s biggest economic powers wanes, nationalism and political interests are taking precedence over globally shared economic goals. Sudden changes in policy and regulation are becoming the new normal. There is still potential, however, for countries to collaborate to address cross-border issues such as cybersecurity, international terrorism, and tax havens.
Sharpen the focus on customers. As companies offer more and more services and solutions to more and more digitally connected buyers, relationships with customers will need to be more than transactional. As the chief strategy officer of a global industrial goods company noted, to make the transition from selling transportation equipment to providing mobility solutions, “our entire sales organization will need to become more customer centric and understand customers’ needs—not just for equipment and upgrades but also for real-time maintenance and platform solutions.” As many global firms set up services and solutions businesses that cut across products, responsibility for profit and loss could shift from product business units to those that own customer relationships.
Decentralize operations and decision rights. The traditional matrix model of overarching tiers of global and regional management control over function areas and product groups is being replaced by more flexible and decentralized structures that empower management teams in individual markets. The need to serve local customers, respond to growing regulation and economic nationalism, and take advantage of local capital will require companies to strengthen their local operations. Decision rights will likely have to decentralize as well. In this environment, global organizations will increasingly achieve scale by using digital technology to exchange information and maintain global standards. “Technology is now enabling real-time data collection at the local level, removing the need for layers of regional and matrix oversight,” explained the chief operating officer of a global consumer goods company.
Centralize select global functions. Greater connectivity and advances in computing and digital technologies are also enabling companies to centralize some critical functions in one location run by a single global team. These teams could be located at headquarters or wherever the company has the greatest capabilities. An example is clinical diagnostics. The global analytics team of a leading medical provider we spoke with uses its access to vast amounts of data to provide diagnoses of tomography scans that are more accurate than those of most physicians in the field. Product design and marketing are other functions that could become more centralized as data is collected locally and then sent via a digital platform for analysis at one location by a team that then uses the insights to develop solutions.
The reflection paper on the harnessing globalisation follows up on the White Paper on the Future of Europe presented on 1 March, which set out the main challenges and opportunities for Europe in the coming decade. The White Paper marked the beginning of a process for the EU27 to decide on the future of their Union. To encourage this debate, the European Commission, together with the European Parliament and interested Member States, will host a series of ‘Future of Europe Debates’ across Europe’s cities and regions.
The paper on the harnessing globalization will be followed by a series of reflection papers on:
- deepening the Economic and Monetary Union, on the basis of the Five Presidents’ Report of June 2015;
- the future of Europe’s defence;
- the future of EU finances.
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