This was submitted as the preface to my Globalization paper.
Notion of Capitalist Competition
A capitalist economy is characterized by free competition (Shane, 1999) in order to achieve its ultimate goal, profit maximization. The capitalist economies are of positive sum, where there is a net positive win; i.e. competition and self-interest of individuals are probably the greatest motivator for efficiency. Besides competition, the notions of capitalist encompass the productivity of labor, specialization of trade, extent of the market, and the accumulation of capital,
The basis of the capitalist ideology supported by the neo-classical proponent is the free market. A free-market (free-trade or neo-liberal) economy is an idealized form market efficient and provides the best allocation of resources. Therefore, buyers and sellers are permitted to carry out transactions based on mutual agreement on price without government intervention in the form of taxes, subsidies, regulation, or government ownership of goods or services.
Globalization: Privatization, Liberalization, Regionalization, and Multilateral
Free market or free trade has been the most significant development in world economic policy in the last two decades, propelled by the globalization movement; the shift towards an integrated and interdependent of world economy through free and unfettered movement of capital, labor, and technologies among countries for the creation of global marketplace and global production for both good and services.
Globalized movement of free market became prominent since nationalist industries became target of large-scale privatization in the 1980’s particularly during the helm of Margaret Thatcher in the UK and Ronald Reagan in the USA. Privatization of public firms was then followed by liberalization of trade between nations. (Hardwick et al, 1999)
Spero (1996) recognizes that the regional initiatives provide an important impetus for international economic integration. A smaller number of countries may be able to reach agreement on liberalization measures that go beyond what could be achieved at a global level.
Since the mid-1990s, services trade liberalization movement has gone beyond the multilateral level. It resulted in the conclusion of a number of sub-regional agreements on services in East Asia and other parts of the world. In East Asia members of ASEAN concluded the ASEAN Framework Agreement on Services (AFAS) covering services trade. Prior to this, ASEAN has concluded the ASEAN Free Trade AREA (AFTA) covering the goods services.
Rule-based Multilateral Trade – World Trade Organization
The multilateral trade is a rules-based, legally binding approach to manage the world trade. Free markets require an appropriate legal and institutional framework to function properly, so that a more integrated world economy demands effective international institutions and "rules of the game”. The General Agreement on Tariffs and Trade (GATT) was the forerunner to the World Trade Organization (WTO) was founded for this purpose.
WTO created a framework that enabled member countries to meet and discuss ways of barriers of trade for goods, i.e. tariffs. Over the years, the number of members has grown from 23 to 146 and the topics for discussion have expanded from trade in goods (such as machinery and food) to trade in services (such as telecommunications and banking). The WTO talks now also cover things like intellectual property, third world development, competition policy, government procurement, and non-tariff barriers.
Pros and Cons of Free Trade
Advocates for free trade and globalization claims that free trade is the key towards economic performance, sustainable development, consumer savings, fostering innovation, promoting transparency and predictability, attracting Foreign Direct Investment (FDI), and technology transfer.
Nevertheless, critics warn that to date free trade has been to the advantages of developed nations and the multinational corporations (MNCs) at the expense of developing and poor nations. Worldwide, there is a call for free trade to be managed to enhance social justice, better development, lower the poverty level, and improved human rights leading to higher standards at work, in civil society and in the living environment.
Nevertheless, the current development at the Cancun meeting hailed the victory of developing and poor nations from being pressured into full commitment in agricultural as developed nations such as America and the EU refused to eliminate subsidies for their farmers. Agricultural is one of the services under negotiation among signatory WTO members. As talk failed in agricultural and other five important issues, it is doubtful that agreement in trade services will be concluded in the next 2005 round.
The free trade in services: General Agreement on Trade in Services (GATS)
The General Agreement on Trade in Services (GATS) was created during the Uruguay Round of trade talks, which was concluded in 1995. Basically it is trying to do for services what previous trade agreements have done for goods — make them easier to buy and sell internationally. If tariffs, subsidies, and quotas are the barriers to trade in goods, the domestic laws and regulations are deemed to be the barriers to trade in services.
Although GATS identifies 11 major services sectors, it comprehensive list comprises of 160 sectors and sub sectors:
- Professional services
- Postal and courier services
- Telecommunications services
- Construction and related engineering services
- Distribution services
- Environmental services
- Financial services
- Tourism and travel related services
- News agency services
- Transport services
- Energy services
GATS classified trade in services may be classified on the basis of the location of the service providers, i.e. Cross-border supply, Consumption abroad, Commercial presence, and Presence of natural persons.
GATS consists the horizontal and vertical commitment framework. Horizontal commitment contains basic signatory obligations across the board to the entire member, meanwhile the vertical commitment applies to service or sub-sectors of which government has chosen to open up (partial, full, none) for competition. Each government must provide a schedule of commitment. Most prominent articles in the horizontal commitment is the Article II of Most Favored Nation, while Article XVII on National Treatment and Article XVI of Market Access stand out in vertical commitment. These articles are briefly described in Figure 2.
Article II – Most Favored Nation
A non-discriminatory principle to guarantee equal opportunity among members
Article XVII – National TreatmentForeign corporations must be treated at least as favorably as domestic companies.Article XVI – Market AccessForeign service providers must be virtually granted unrestricted entry into the sector.
By committing a service sector to GATS, a government makes a binding decision not to regulate that sector in a way that discriminates against overseas-owned companies. They must also agree not to limit the size or shape of the market, for example by limiting the number of service providers. Otherwise, other members could bring the matter to the Dispute Settling Mechanism for arbitration and negotiation.
The reason GATS generates so much debate is that some believe it puts undue pressure on governments to privatize public services such as water, telecommunications, health, education or prisons, it also may interfere with governments’ ability to regulate or subsidize such services, detrimental to poverty reduction strategies, and weaken the role of government because multilateral trade rules will be used to determine domestic policy of government. In conclusion, the role of government will be changed and at its worst, dismantled.