Social and economic impact of multinational companies’ involvement in international trade

Marcus Becker
Dec 30, 2018 · 10 min read

The appearance of an international society where environmental, cultural, political and economic incidents in any part of the world affect the rest of the world significantly is considered as globalisation. The enhancement in trade between nations and the movement of capital such as currencies and investments are known as international trade, which is one of the most significant indications of globalisation.

The World Trade Organisation emerged as a non-governmental organisation to control international trade. Established in 1995 the WTO is considered to be the only global system that rules the trade regulations between nations. Also, it has the responsibility of resolving, “trade disputes and enforcing rules” concerning tariffs. With 149 member countries, the WTO aspires the liberalisation of trade through free trade.

Furthermore, the expansion of multinational corporations is a crucial ingredient in this newly developing era as they play a vital role in most countries affecting them socially and economically. A multinational corporation is a company that has branches in at least more than two countries. These corporations operate in multiple countries to lessen the expenditure of transportation and import tariffs, or to protect their patent rights and in other cases to benefit from monopolistic advantages (University of Toledo, 2006).

This essay will present the extent to which multinational corporations are involved in international trade and the economic and social impacts resulting from this involvement. Based on three main case studies this essay will be divided into three main sections as follows. The first section will present an in-depth argument of multinational corporations in the banana industry; Chiquita and Del Monte will be introduced as a sample of the situation. Moreover, the Lomè agreement will be discussed along with its effects. Moving on to the textile industry the MFA agreement and the largest multinational retailer Wal-Mart will be analysed and their impacts evaluated. Some examples of the pharmaceutical industry for instance TRIPS agreement will be taken into consideration, and some of the big pharmaceutical multinational corporations such as GlaxoSmithKline actions will be analysed and their effects assessed.

Bananas are classified amongst the most valuable main agricultural export corps in the world and are produced by more than 120 of the world’s nations. As stated by the UNCTAD (1998), that the total production of bananas was equivalent to 88 million tones which of no more than 13 million tonnes entered the world trade. Hence it can be realised that some nations or in other words some multinational corporations dominate the bulk of the banana exports. Supporting this S. Black (2001) reported that 95% of the world banana market is controlled by large multinational corporations operating mainly in Latin America such as Chiquita, Del Monte, Bonita, Dole, and Fyffes, whereas other small companies hold the remaining percentage.

Banana exports in some countries are the primary source of income as they are imported into over 100 markets worldwide. However, similarly, as banana exports are concentrated in a few countries, three main markets dominate most of the banana imports. The three primary and largest banana import markets as confirmed by the UNCTAD (1998), are the US, the European Community, and Japan which account for an average of 66.6% of banana imports worldwide. Hence it is typical to comprehend that the substantial multinational corporations’ performance and involvement have significant impacts on the capital of the banana economy worldwide and on the lives of the populations, which their lives are dependent on it.

The multinational Chiquita has made several positive social and economic impacts on the countries it operates in due to its involvement in international trade. Employment, one of the essential elements for a good livelihood is one of the benefits provided by Chiquita in Latin America. Chiquita (2006) claims that their company is employing a total of 26,000 full-time international workforces from which 21,500 are working and living in the different countries in Latin America where Chiquita banana plantations exist.

Chiquita has not only created employment to thousands of people but also and as confirmed by Chiquita (2006), it has been constructing essential infrastructure buildings across Latin America such as rail and road networks, hospitals, ports, power stations as well as educational institutions. Also according to International Banana Union Alliance (2004), Chiquita has the largest unionised number of workforce amongst other corporations in Latin America. Hence it can be considered that that multinational Chiquita is helping to raise the living standards and life quality of its employees socially. Moreover, economically it has been contributing to its exports widely to the annual income of the Latin American countries, which it is operating in.

In contrast, there were several criticisms concerning the impacts of the banana multinational Del Monte. Some of these criticisms were the bad hygiene conditions in Del Montes El Ceibo plantation, which was supported by a report by Shaw N (2000), where dead rats could be seen in the water pipes. Moreover, he goes on by presenting that Del Monte is spraying the bananas with an overdose of agricultural chemicals, which might have a deadly effect on pregnant women. Also, he reports that female workers are subjected to sexual harassment and their children are under the danger of abuse. Also one of the worst impacts was that the workers had no worker unions to protect or claim their rights (Shaw N, 2000).

Another negative impact resulting from the involvement of the multinationals in the banana industry can be seen while examining the Lomè Convention. The convention was an agreement signed in 1975 between the European Union and some specific African Caribbean Pacific countries. This agreement aimed to provide some of these ACP countries with an advantaged tariff-free with discrete quotas access to European markets (European Commission, 1997). Jamaica as an ACP country and the UK as part of the EU is a good illustration for this agreement. As reported by S. Black (2001), that Jamaica has been enjoying the privilege of exporting 90,000 tons of bananas into a tariff-free guaranteed market in the UK. However, all this came to an end as a result of the covetous multinationals that controlled 95% of the world’s banana market and still craved to dominate the remaining 5%. Hence large American owned multinationals such as Chiquita and Dole convinced the WTO through the American government to end this agreement, by proving that the agreements preferential rates were illegitimate and hence against the WTO regime S. Black (2001).

The end of this agreement led to some implications to the previous dependants on this agreement. Small producers that previously controlled the minor 5% of banana exports are now not able to compete with the large multinationals. This might lead to their bankruptcy and hence the unemployment of thousands of people. Unemployment usually results in destructive social impacts, such as extreme poverty levels and therefore a sharp increase in crime rates. Moreover, the economies of such countries like Jamaica will be severely affected and damaged. Hence the impacts of the multinationals in ending the Lomè agreement were seriously destructive.

The textile industry, which is the next case study to be examined, is considered to be one of the most crucial sectors specifically for developing countries, as it represents a critical income source and a large employment sector. Although this industry is providing millions of jobs, Oxfam (2006), reports that the working conditions in textile factories are often insecure and furthermore the developed countries mainly the US and the EU are limiting access to their markets in a protective scheme.

Sheltered by the Multi-fibre arrangement the rich developed countries are protecting their markets using this restrictive system of high tariffs and immense import quotas. The developing countries had to pay a high price as a result of this arrangement, which was equivalent according to the World Bank (2006), to an annual sum of 27 million jobs and an average of $40 billion. However this arrangement is coming to an end as it is considered to be against the regulations of the WTO free trade initiative; nevertheless this will lead to some significant social and economic impacts.

Before this arrangement was coming to an end, large multinationals moved from the countries that had a limited share in the developed market, to countries such as Sri Lanka and Bangladesh to escape the restrictions. However, now that the quotas are going to be lifted these two countries will face some destructive consequences due to the rising competition. According to In Business (2004), Sri Lanka will have to begin producing more refined products than just the basic ones, to keep up with the competition. If not, Sri Lanka’s economy and society will be fatally affected; the small factories bankruptcy is a case in point. Currently, there are 800 textile factories in Sri Lanka of which 400 are considered to be small. If the small factories in Sri Lanka shut down as a result of their low productivity rate, millions of people that were employed in this sector would be scattered (In Business, 2004). Hence an increase in Sri Lanka’s unemployment rate can be predicted, which might eventually lead to a rise in crime and declination in the living standards.

Moreover this will also affect the economy as seen according to In Business (2004), the textile industry in Sri Lanka is currently the most significant export income source. Hence the results of terminating the MFA will lead to undesirable effects for both Bangladesh and Sri Lanka. This is because all the millions of jobs and factories created in these non-quota countries by multinationals are now under threat of disappearance.

Another example of the effect of multinationals in international trade can be illustrated by presenting Wal-Mart. With 5200 stores and 1.5 million employees, Wal-Mart is the largest retail multinational corporation in the world according to War on Want (2005). Wal-Mart popularity is mainly a result of its meager prices and its policies of “cutting costs at any cost” (War on Want, 2005). It is believed to be very pleasant to be able to purchase merchandises at meager prices; however the cost that Wal-Mart pays to achieve this is causing some social and economic implications.

An evident impact of Wal-Mart is that its low price policy is incompatible by other multinationals or smaller retailers. War on Want (2005), supports this by presenting a statistic from Wal-Marts first 12 years of operation in the state of Iowa in the US. This statistic shows that during this period 30% of hardware, 50% of clothing, 26% of the department and 42% of variety stores have all went out of business and closed down. This resulted in some severe economic losses in the region, which resulted in social impacts, such as the unemployment of the hundreds of people that used to work there.

In achieving its meager product prices, Wal-Mart is adopting a policy where the wages of its employees are meager and at extreme cases even lower than the industrial standards. Hence its employees are suffering from low wages, long working hours and also it strongly opposes to form worker trade unions. Furthermore, this massive multinational pressures its suppliers to supply extremely cheap goods, to be able to keep up with its policies (War on Want, 2005). The weight is eventually transferred to the workers working in the factories. For the suppliers to provide low price products, it needs to reduce the wages of its employees to a rock-bottom salary. Hence Wal-Marts cost of cutting costs is the suffering of employees in lousy working conditions.

The world’s largest global enterprise the pharmaceutical industry is the next and final industry to be presented. Dominated by several multinationals, and according to the United Kingdom’s parliament (2005), this industry is the most profitable and hence it has the most relevant economic and social impacts. There are several processes carried out by this industry such as inventing new medicines through research and development known as R&D, hence resulting in several effects.

According to The European Federation of Pharmaceutical Industries and Associations (2006), that the expenditure for research and development is hugely high about 600 to 900 million euros, however not all new compounds are sure to succeed. Moreover, each compound that experiences failure is depleting millions of euros as investment losses. Hence the cost of manufacturing the medicine is insignificant when compared with the cost of R&D.

The main impacts caused by multinationals are due to the high cost of the medicines, which the multinationals claim that it reflects the expenditure of R&D. This last is preventing millions of sick patients from accessing their required treatments, and hence threatening their lives. N. Miles (2005) reported that 15% of South Africa’s population, which is equivalent to 6 million people, are HIV positive. Furthermore, he goes on by stating that they need lifelong treatment, which includes taking up to 30 pills daily. Also, failure to take all the required medicines might damage the effect of the procedure. In overcoming this social and economic impact, several companies are creating and selling generic drugs at meager prices in comparison with the original ones.

India according to Avert (2006), is one of the most critical countries in producing generic drugs, because both the raw ingredients and the finished tablets are provided there. India manufactures and sells these drugs around the world and mainly in developing countries with a portion of what the original drugs cost, Hence India is a significant source for generic drugs, which hundreds of thousands of HIV patients rely on. According to TV Padma (2005), about 350,000 HIV patients depend on generic drugs produced by multinationals operating in India. However, this large production of generic drugs is coming to an end because India’s patent laws have to comply with Worlds Trade Organisations regulations on patent rights known as TRIPS.

The World Trade Organisation enforced trade-Related aspects of Intellectual Property Rights or TRIPS in 1995. According to Avert (2006), TRIPS was established to ensure the respect within international trade of intellectual property rights. This means that no company can create a copy of any invention created by another company. Hence due to this agreement, Indian companies can no longer create generic versions of original drugs. Although large multinationals supported this agreement, it had some very negative impacts on the societies and on India’s economy. Firstly the 350,000 HIV patients mentioned above will be denied access to their treatment, and hence their treatment program will be ruined. Besides, it can be established that the economy of India will be affected, as a result of stopping the production of generic drugs. Also, a common consequence of the decline of any countries economy is a decrease in the quality of life and a possible increase in crime rates.

On the other hand, there were some positive impacts caused by large pharmaceutical multinationals such as GlaxoSmithKline. This large multinational is claiming to be the only pharmaceutical company that is supplying the least developed countries of Africa with the necessary anti-HIV drugs for free. Nevertheless, according to GlaxoSmithKline, it is training 80000 healthcare employees to monitor and provide help for HIV patients. Another significant positive impact is the multinationals are developing and enhancing the healthcare technology, by inventing and creating new medicines and drugs. Moreover, as this is the largest industry in the world, it is employing millions of people across the globe.

Marcus Becker

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Freelance journalist - when I’m not carving out a juicy story for publications, you can find me drowning my sorrows in the pungent comforts of a Cortado.

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