Globalization, CARICOM and Margins of Preference

• Author: Bhoendradatt Tewari/Roger Hosein
• Pages: 66-97

Chapter 3

Globalization, CARICOM and Margins of

Preference1

This chapter assesses the implication of globalization on CARICOM’s

margins of preference in various sectors. Globalization has progressed

rapidly during the last century and especially during the last two decades.

This paper traces the impact of globalization on several preferential

trading arrangements which CARICOM currently enjoys, particularly

Caribcan, CBI and Lome. It also considers the impact of globalization on

the CARICOM common external tariff, which was established to help

provide an umbrella for the development of local enterprise. The paper

shows how these margins of preference are being eroded for a variety of

reasons in a rapidly globalizing world and provides various policy

suggestions as to how the region should proceed into the future.

A revised version of this chapter will be published in R. Marshall, Socio-

Economics of Health Care and Health Conditions in the Caribbean:

Planning for the future, Vol. 2, School of Continuing Studies, The

University of the West Indies, St. Augustine in 2007.

1 The authors would like to acknowledge the support of Rishi Singh.

CARICOM and Margins of Preference 67

3.1 INTRODUCTION

Globalization may be defined as the process of intensification of the

interconnectivity of economic, political and social activities across

borders, which tend to stimulate the world economy and result in human

innovation and technological progress.2 This is not to say however, that

globalization is a panacea; for it is also becoming increasingly clear that

under certain circumstances, globalization can increase the vulnerability

of countries to foreign shocks.

The process of globalization can be broken up into three distinct parts.

The first phase lasted until around 1914, during which time the majority

of trade took place between metropoles and their hinterlands. The second

phase of globalization lasted until just after the Second World War. This

second phase is characterized by a period of consolidation and

expansionism after the Great Depression of the 1930s, which led to a

reassessment of the virtues and benefits of international trade. During

this period, the world economy also witnessed the emergence of the

Bretton Woods System of global, economic and financial management,

which began to operate through the establishment of the International

Monetary Fund, (IMF) the World Bank (WB) and the General

Agreement on Tariffs and Trade (GATT).

The third round of globalization started after the Second World War.3

This third phase of globalization is the most intense and expansive phase

of globalization thus far and is characterized by the internationalization

of production and technological improvements on a scale hither to

unknown in a wide range of areas from information to biotechnology. In

this phase of globalization there has also been a considerable amount of

trade liberalization and a substantial removal of barriers to FDI

accompanied by a generally diminished role for the state and the

2 As early as 1776, Adam Smith recognized that globalization would be a force of

tremendous importance in the global development process. In particular, Smith noted

that, “the discovery of America would be a force for economic development and that of a

passage to the East Indies by the cape of Good Hope, are the two greatest and important

events recorded in the history of mankind” – Smith made this statement because these

events would allow “the most distant parts of the world” to “relieve one another wants”

and “encourage one another industry”, (Smith 1776): Vol. 2, pg. 141), cited in Sachs

(2000, 579).

3 Some authors, e.g. Nayyar (1999) have argued that globalization requires the presence

of a world super power. After the Second World War the United States emerged clearly

as the dominant world power. However, as Nayyar notes political dominance by itself is

not sufficient and what was also needed was an economic giant whose own national

currency was virtually universally accepted as medium of exchange, unit of account and a

store of value, this has also been the experience of the USA since the Second World War.

Trade, Investment & Development

68

formation of mega trade blocks in both hemispheres. In this phase, the

World Trade Organization (WTO) was established to overseer the

acceleration of free trade on a global scale.

International trade theory in the form of the Heckscher-Ohlin-Samuelson

(H-O-S) model can be used to cast some light on the economic

implications of globalization.4 The H-O-S model suggests that a fully

integrated world economy presents the best basis for continuously

improving welfare of the human race. The theory proposes that the most

optimal use of a country’s resources occurs when a nation produces and

exports those commodities in which that nation has an abundance of

factors of production and imports those commodities, which call for

factor proportions in the opposite direction. The H-O-S theorem is

premised on the assumption that there are no inhibitions on the

movement of goods and factors of production, that information is widely

available, and that there is a high element of competition. However, it is

well known that the theoretical requirements of the H-O-S model do not

hold perfectly in the real world, especially since in the existing global

system there are in fact several barriers to the free movement of factors

of production.

Since the Second World War, however, there has been substantial

progress in the realm of trade liberalization. In particular, since the

Uruguay Round trade agreement which was reached in 1995, the world

economy realized an increase of over US$100bn a year in trade benefits,

most of which have accrued to precisely those countries which had

reduced their trade barriers. The gains from trade find expression in

faster economic growth and higher standards of living. World export of

goods and services in 2001 was an estimated US$7.6 billion as compared

to an annual average of US$2.3 billion a year during the period 1983-92.

Similarly, astonishing changes have taken place as regards global gross

capital flows which in 2000 was US$7.5 trillion as compared to US$1.4

trillion in 1990, an increase of almost 450%.5

CARICOM member states were “discovered” during the start of the first

phase of globalization, and eventually attained the status of important

commercial exporters of sugar. Since then, however, the importance of

sugar as a major commodity traded on the international market by

4 In a global market economy firms will benefit from economies of scale and the income

of poor nations would come closer to that of rich nations as economic activity worldwide

takes place uninhibited. The invisible hand governs globalization.

5 Globalization has attached to it a number of challenges, which need to be overcome if

its progress in the world economy is to continue unabated. In the first instance

globalization is associated with economic instability, typified perhaps best by the Asian

financial crisis of 1997 in which the economies of some of the most newly industrializing

countries of the world have come under threat.