Sawyer and Sprinkle (2006) define globalization very generally as “the increasing openness of an economy” (p. 14). Although this definition is serviceable enough, its vague meaning is not very helpful. More specifically, globalization relates the idea that international factors are becoming increasingly more important in the world economy. Globalization is not a term meant to convey a positive or negative nature. Instead, it merely refers to the growing interaction between between countries in a world economy (Sawyer & Sprinkle, 2006).
Generally speaking, both partners in international trade have something to gain. Generally speaking, Mexico is a country that specializes in inexpensive labor. After NAFTA, the opportunity cost of producing cars in Mexico is reflected in the cost of the cheaper materials that must be imported into the country. Although the increased import of raw materials means that Mexican materials producers will not be able to charge the same pre-NAFTA inflated prices, the increased automotive production of the country will result in an overall growth of Mexico’s Gross Domestic Product (Sawyer & Sprinkle, 2006).
The effect of trade by the U.S. and Mexico will be the opposite for the U.S., but the result, growth, will be the same. Since inexpensive labor is the specialty of Mexico, jobs will be moving out of the United States. The gains from trade of moving production to Mexico will be less expensive automobiles. This would be the result even if labor was the only factor of production (as suggested by the labor theory of value). Since NAFTA has opened trade between the U.S. and Mexico, cheaper raw materials are available to be imported into Mexico for automotive production. The overall benefit to the U.S. is increased imports in the forms of automobiles and increased exports in the form of raw materials (Sawyer & Sprinkle, 2006).
The trade policies of the host country’s government plays a role in the success of a multinational corporation. Trade policies in the form of tariffs affect the cost of materials necessary for production. Although high tariffs have a negative impact on the multinational, they are only truly problematic if they are not stable. In other words, tariffs that are constantly changing present challenges to the multinational including fluctuating prices and instability in the availability of imports the multinational corporation needs (Sawyer & Sprinkle, 2006).
Prior to the NAFTA agreement, it was not efficient for the U.S. to move low-skilled jobs to Mexico. The requirements placed on the automotive industry in regards to import / export levels and the use of domestic resources is an example of the protectionism that makes international trade not work. After the NAFTA agreement, it makes perfect sense for the U.S. to move low-skilled jobs to Mexico. Mexico is able to specialize in low-skilled, inexpensive labor. With the ability to freely move inexpensive raw materials into Mexico, the prices of products exported from Mexico will drop. As the price for the product drops, demand will increase and more units will be sold (Sawyer & Sprinkle, 2006).
Whenever a business begins conducting business in the world economy, questions of ethics will arise. When conducting business in a foreign country, multinational corporations must allow the people of the host country to be involved in decisions that affect them. Assuming the people of the host country have adequate representation in their government, the standards and requirements set by the host government should adequately address these cultural concerns (Boatright, 2007).
Boatright, J. (2007). Ethics and the conduct of business, 5th ed. Upper Saddle River, NJ: Pearson Prentice Hall.
Sawyer, W. C., & Sprinkle, R. L. (2006). International economics, 2nd ed. Upper Saddle River, New Jersey: Pearson Prentice Hall.