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      - page 4 / 47





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he 2008 world financial crisis has demonstrated that the forces of globalization1 have affected two major parts of the world economy: the global financial system and the global production system. These financial and real (goods-and-services producing) sectors are closely interconnected and synergistically intertwined. The financial crisis demonstrated that the combination of globalization, new technology, new financial instruments, and unrecognized risks, can cause major upheavals in markets that can spread from firm to firm and then from country to country. T

In this globalized world, production is becoming more fragmented into discrete activities and can be spread geographically within and across national borders while remaining integrated organizationally within a multinational company or network of companies. This report begins with an overview of global supply chains, why they have developed, and how the variables in the chain (including government policy) relate to each other. It then examines the types of policies that affect different parts of the global supply network and concludes with a discussion of policy review mechanisms. In any global supply structure, there are trade-offs between border transaction costs (including tariffs), factor costs (including labor and capital), logistical costs (including shipping), costs of quality control, external business costs (ease of doing business, regulations, etc.), and various risks (including financial and political risk). Government economic policy often affects each of these tradeoffs in different ways.

Globalized manufacturing chains relate directly to the two main national interests of the United States, security and economic well-being, and relate indirectly to the third—the projection of American values. On the security side, the constant flow of imports streaming into U.S. ports and through border crossings raises the potential for illicit or dangerous cargo, including possible terrorist devices, to enter the United States. On the economic well-being side, the globalized supply chains represent changes in crucial segments of the U.S. economy that ultimately affect the well being of Americans. They bring into play fundamental economic issues such as jobs, wage levels, income distribution, entrepreneurship, and the profitability of businesses. At a more basic level, U.S. manufacturers and providers of services form the foundation of the economy and generate the resources available to support the well-being of Americans, governmental activities, and the ability of the nation to pursue its security and other national interests.

As for the projection of American values, globalization and the economic opportunities it generates, can raise standards of living in countries, such as China or Vietnam, and thereby can potentially create alternative centers of power and channels of communication that may challenge repressive governments or help in resolving problems with democracy, the rule of law, and human rights. However, globalized supply chains also may provide resources for certain repressive governments or, in the case of China, help in providing a rationale for the ruling party to continue its dominance. The presence of U.S. or other international corporations in countries may provide a mechanism for U.S. business and labor practices, as well as language, culture, and values to be spread to other parts of the local populations. Foreign investors, however, may be attracted to authoritarian governments because they tend to create stability even though that stability may be at the sacrifice of certain freedoms or human rights. The globalization of manufacturing also is

1 Globalization refers to the development of an increasingly integrated and interconnected world economy marked by liberalized trade flows, high mobility of capital, transnational businesses, and greater interdependence among national economies.

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