5.2.4 Globalisation and loss of state sovereignty

Helpful prior knowledge and learning objectives

Helpful prior learning:

Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 5.1.1 The state as a system, which defines the state, its parts and their relationships, and some ways to classify states
Section 5.1.2 Origins, legitimacy and power of states, which explains how states came about, how they gain legitimacy and maintain power
Section 5.1.3 Functions of the state, which explains the various roles of the state in providing goods and services, protecting the population, and stabilising and guiding change
Section 5.1.4 Balancing state and non-state power, which explain the importance of balancing state and non-state economic power and strategies to achieve such a balance
Section 5.1.5 State narratives: Neoliberalism, which describes the neoliberal narrative and explains how it came to dominate economic thinking

Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.3 Systems diagrams and models, which explains the systems thinking in some familiar information tools as well as the symbols used to represent parts/wholes, relationships and perspectives

Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems.
Section S.9 System traps, which explains how system structures, like reinforcing feedback, too weak or late balancing feedback, and/or pursuing flawed goals, can create persistent problems.

Learning objectives:

discuss how globalisation and loss of state sovereignty threaten the state’s ability to meet human needs within planetary boundaries

In 2010, Uruguay passed strict anti-smoking laws, requiring large health warnings on cigarette packs and banning misleading branding. A multinational tobacco company sued, arguing the regulations harmed its profits. The case dragged on for years, costing Uruguay millions in legal fees. Though Uruguay won in court, the lawsuit showed how multinational companies can use global trade rules to challenge national policies that benefit people and the planet.

Figure 1. Uruguay passed strict laws on smoking that were challenged by a multinational tobacco company in an international court. Uruguay won.

(Credit: Connor McManus, Pexels license)

What is globalisation?

Globalisation is the growing connection between countries through movements of goods, services, people, money and ideas across borders. Advances in transport and communication, along with trade agreements that reduce tariffs (taxes on imports), and other trade barriers have made global exchanges faster and cheaper.

Some forms of globalisation support human and ecological wellbeing, such as cooperation on climate action through the Paris Agreement or the work of the World Health Organization (WHO) on public health. Others, especially those led by powerful corporations and profit-focused trade rules, limit the sovereignty of states, making it harder to meet their essential functions (Section 5.1.3). This section mainly focuses on that second kind of globalisation.

Figure 2. Globalisation means that products now flow easily across borders.

(Credit: Grant Eaton, CC BY-NC-ND 2.0)

How does globalisation impact state sovereignty?

While globalisation boosts exchanges between people, it also limits national decision-making in several ways.

Trade and other international agreements

Many international trade and investment agreements include rules that limit what states can do to regulate businesses. If a country wants to protect its farmers by taxing foreign food imports through tariffs or introducing strict product quality laws to protect its people, trade agreements might prevent this. These agreements often allow corporations to sue states in special courts if a policy affects profits. This process is called Investor-State Dispute Settlement (ISDS) (Figure 3).

Figure 3. ISDS enables a foreign investor to sue another country if the state makes a decision that affects its investments and profits.

(Credit: Columbia Center on Sustainable Development)

ISDS cases are increasing, and they are costly for states when they lose cases, but also costly in terms of delayed action to protect people and planet. A 2025 investigation by The Guardian found that fear of billion-dollar lawsuits under ISDS is delaying the phase-out of fossil fuels in many countries. States worry that oil and gas companies will sue if they introduce stronger climate laws. This fear holds back action needed to meet global climate goals.

This system often favours powerful multinational companies, especially those based in wealthy countries, and places a heavy financial burden on lower-income nations. It creates a risk that global rules will serve corporate profits more than public interest.

Multinational corporations and dependence

Multinational companies operate across borders. They often argue that national rules like higher minimum wages or strong environmental laws increase their production costs and make them less competitive in global markets. Some threaten to move production abroad unless states weaken regulations. States fear rising unemployment and lower tax revenues if this happens.

This pressure affects state policy. For example, Germany’s economy depends heavily on the car industry, which faces strict EU emissions laws and rising competition from low-cost producers China. European car companies have lobbied the EU to delay new environmental rules to prevent rising production costs and give them more time to adapt. In response, the EU postponed stricter rules planned for 2025.

Photograph of a Volkswager car factory with lightening behind it

Figure 4. Germany’s economy relies heavily on the car industry, which faces intense global competition. To prevent collapse or relocation, Germany and the EU yield to pressure on taxes and emissions.

(Credit: Bernd, licensed from Adobe Stock)

This shows how economic dependence on dominant industries with a global presence makes it difficult for states to regulate corporations without risking job losses or investment relocation. When states compete to attract or keep investment, they may feel forced to lower labour or environmental standards. This weakens their ability to protect workers and ecosystems.

Financial pressures on states

States also face pressure from global financial markets. Globalisation has made it easier for investors to move money quickly around the world, looking for safety and profit. If they see a country as risky because of high debts, inflation, or political unrest, they may take their money out. This is called capital flight. It can cause the value of a country’s currency to fall, raising the cost of imports like fuel, and making borrowing more expensive.

These financial pressures limit what states can do. Governments may adopt policies that please global investors instead of helping their people. For example, they may remove regulations on business, cut spending or avoid raising taxes on corporations and wealthy individuals.

When countries get into financial trouble like risking debt default, they may need to turn to organisations like the International Monetary Fund (IMF) for loans. The IMF often requires countries to adopt policies to limit state spending, called austerity (Section 5.2.1) or sell off state assets to private firms, called privatisation (Section 5.2.2). For example, in 2020, Zambia defaulted on its debt during the Covid-19 pandemic. To qualify for a new loan, it had to remove fuel and farm subsidies. This raised prices and limited the state’s ability to address energy and food security for its people.

Figure 5. During the Covid-19 pandemic, Zambia asked for financial help with its debt crisis and had to follow IMF-imposed economic policies to receive it.

(Credit: Lau Ka-kuen, South China Morning Post)

Global rules and cooperation

While the previous examples show how globalisation can limit state action to support people and the planet, not all global rules work this way. Some international agreements are designed to strengthen a state's ability to act for the common good. They do this by supporting cooperation on climate, tax fairness, and environmental protection. These agreements can help states resist internal pressure from powerful interests that seek to weaken regulations or avoid taxation through state capture (Section 5.2.3).

For example, the Paris Agreement encourages countries to reduce greenhouse gas emissions. This binding global agreement can give states the backbone they need to stand up to the fossil fuel industry and demand environmental reforms. But participation depends on political will. The United States, under President Trump’s administration, has withdrawn from the Paris Agreement twice, claiming it limited state sovereignty.

Similarly, global tax agreements aim to stop multinational companies from shifting profits to tax havens, countries with low or no taxes. This practice, called tax avoidance, reduces money available for states to invest in public infrastructure and services like schools and hospitals. States may feel forced to lower their own taxes to attract large companies to operate in their country. This is an example of the system trap of escalation (Section S.9), where countries compete in a race to the bottom that harms everyone in the long term. International agreements, like the OECD's minimum tax deal agreed to by 140 countries, can help fix this, but only if all major economies take part.

Figure 6. The United States is an outlier in terms of the Paris Agreement to limit greenhouse gas emissions.

(Credit: Statista, with data from the UNFCCC)

Figure 7. The OECD minimum tax Pillar Two Rules aim to ensure that large multinational enterprises (MNEs) pay a minimum level of tax regardless of where their headquarters are or where they operate.

(Credit: Tax Foundation)

Can globalisation be reshaped to support sovereignty and cooperation?

The goal is not to reject global exchange and cooperation. In fact, shared challenges like climate change, biodiversity loss, and economic inequality require cooperation. But globalisation must be redesigned so that it works for the many, not just the powerful few.

A regenerative economy depends on both national sovereignty and fair international rules. Trade, finance, and investment systems should support human rights, climate action, and public wellbeing, not limit them. That means rethinking international agreements, creating better dispute systems, and strengthening democratic control over global rules. By reshaping globalisation, we can protect the sovereignty states need to care for their people while still working together to meet current and future challenges. These and other issues will be taken up in Topic 7: International exchanges.

Activity 5.2.1

Concept: Power

Skills: Thinking skills (transfer)

Time: varies, depending on option

Type: Individual, pairs, or group

Option 1: How does state capture and corruption threaten state functions?

Time: 25 minutes

Look back at what you learned about the three main functions of the state in Section 5.1.3 (Figure 8). Then reflect on what you have learned in this section about state globalisation and loss of state sovereignty.

Work individually, with a partner, or in a small group.

Explain how globalisation and loss of state sovereignty can stop the state from carrying out its functions.
Are there some functions that might be more affected than others? If so, why?

Figure 8. Three broad functions of the state. How does globalisation and loss of state sovereignty threaten them?

Option 2: Kuannersuit case in Greenland

Time: 40 minutes (could be shortened if students read the condensed article)

Read the following Guardian article on the Kuannersuit mining site in Greenland. Energy Transition Minerals, Ltd., an Australian-based multinational company, is suing Greenland after the country banned uranium mining in 2021, making ETM’s mining site lose value. If you are short on time, you can find a condensed version by clicking the arrow.

Individually, in pairs or small groups consider the following questions:

Why did Greenland ban uranium mining, and why is ETM suing the government?
How does this case illustrate the impact of ISDS on state sovereignty?
What are the environmental and financial risks involved for Greenland?
Should governments be able to change their laws when public health or the environment is at risk, even if companies lose money?

Fearing toxic waste, Greenland ended uranium mining. Now, they could be forced to restart - or pay $11bn

Kuannersuit in Greenland: Mining, Sovereignty, and the Environment

In south-west Greenland, near the small town of Narsaq, lies a mountain with one of the world’s largest undeveloped deposits of rare earth minerals and uranium. These rare earths, used in wind turbines and electric cars, are in high demand for the global transition to cleaner energy. A company called Energy Transition Minerals (ETM), based in Australia, planned to build a large open-pit mine there, worth around $7.5 billion.

But many local people were deeply worried. Mining rare earths at this site would also mean unearthing uranium, which is radioactive. Communities feared that the mine would release toxic waste into the water and air, harming sheep farms, marine life, and people’s health. Greenland has a history of mining pollution, and many still live with the damage caused by mines opened decades ago.

In 2021, a new government was elected in Greenland after promising to ban uranium mining. It passed a law to keep that promise, making the Kuannersuit mine illegal. Many celebrated this as a win for the environment and for the rights of local communities. But the mining company is now suing Greenland through the ISDS system (Investor-State Dispute Settlement), demanding $11.5 billion in compensation. That is almost ten times Greenland’s annual budget.

ETM argues that it invested over $100 million in preparing the site, based on the belief that mining would be allowed. It says the ban is unfair and counts as expropriation—when a government takes private property without compensation. Greenland says the decision was democratic and made to protect the health of people and ecosystems.

Greenland’s minister of mining, Naaja Nathanielsen, says the lawsuit is an attack on the country’s right to make its own decisions. She argues that the company is trying to pressure Greenland into changing its laws, even though the ban followed a public hearing and an election. The company disagrees and says it has followed all the proper steps. It is backed by an outside legal investor, which will get part of the money if the case is successful.

This case is one of many that show how ISDS is being used by companies to challenge environmental decisions. Critics argue that it puts too much power in the hands of investors, and can stop countries from taking action to protect people and the planet. Supporters of ISDS say it protects businesses from unfair treatment by governments.

The mine at Kuannersuit has become a symbol of a wider question: who gets to decide when economic development harms the environment or public health? As Greenland prepares for another election, the debate continues.

Ideas for longer activities and projects are listed in Subtopic 5.5

Checking for understanding

Coming soon!

Further exploration

Planet Money’s T-Shirt Project – A video series from NPR’s Planet Money following the global supply chain of a simple cotton T-shirt, from cotton farms to factories to shipping networks. It highlights the role of globalisation, trade agreements, and labour conditions in modern manufacturing. Difficulty level: easy.
How Containerization Shaped the Modern World – A short animated video from TED-Ed explaining how the invention of shipping containers revolutionised global trade, making it faster and cheaper, but also contributing to job losses in local industries and increased global economic interdependence. Difficulty level: easy.
ISDS 101: Investor-state dispute settlement explained: A short animated video about ISDS from a Canadian perspective. Difficulty level: easy
ISDS: Fear of Billion-Dollar Lawsuits Stops Countries Phasing Out Fossil Fuels – A news article from The Guardian on how ISDS lawsuits are discouraging governments from enforcing environmental policies, with real-world examples of fossil fuel companies suing states over climate action. Difficulty level: easy.
Investor-State Dispute Settlement (ISDS) - A Primer – A short guide from Columbia University’s Center on Sustainable Investment explaining how ISDS allows multinational corporations to sue governments when regulations impact their profits. Includes case examples and key concerns about state sovereignty. Difficulty level: medium.

Sources

Columbia Center on Sustainable Investment. (2022). A primer on international investment treaties and investor-state dispute settlement (ISDS). Columbia University. https://ccsi.columbia.edu/content/primer-international-investment-treaties-and-investor-state-dispute-settlement

Allan Olingo, A. & Esiara, K. (2024, May 29). The end of secondhand clothes. Foreign Policy. https://foreignpolicy.com/2024/05/29/the-end-of-secondhand-clothes/#:~:text=In%202015%2C%20Kenya%2C%20Rwanda%2C,have%20hit%20its%20clothing%20exports

Harvard Law Review. (2017). Philip Morris Brands Sàrl v. Oriental Republic of Uruguay: Tribunal holds that Uruguay's anti-tobacco regulations do not violate Philip Morris's investment rights. Harvard Law Review, 130(7), 1986–1993. https://harvardlawreview.org/print/vol-130/philip-morris-brands-sarl-v-oriental-republic-of-uruguay

Centre for Climate Engagement (n.d.). Trade law and climate change. Hughes Hall University of Cambridge. https://climatehughes.org/law-and-climate-atlas/trade-law-and-climate-change

International Monetary Fund. (2008). Globalization: A brief overview. https://www.imf.org/external/np/exr/ib/2008/053008.htm#:~:text=regions%2C%20that%20as%20countries%20,years%2C%20as%20a%20number%20of

Stein, H., & Chitonge, H. (2025, January 9). The Zambian debt default: A structuralist perspective. Georgetown Journal of International Affairs. https://gjia.georgetown.edu/2025/01/09/the-zambian-debt-default-a-structuralist-perspective/

Darnal, A. (2024). Moving from unequal to win-win partnerships. Stimson Center.https://www.stimson.org/2024/moving-from-unequal-to-win-win-partnerships

Weston, P. & Greenfield, P. (2025, March 6). ISDS: Fear of billion-dollar lawsuits stops countries phasing out fossil fuels. The Guardian. https://www.theguardian.com/environment/2025/mar/06/isds-fear-of-billion-dollar-lawsuits-stops-countries-phasing-out-fossil-fuels-aoe?CMP=Share_iOSApp_Other

Gray, A. (2017). What is globalization anyway? World Economic Forum. https://www.weforum.org/stories/2017/01/what-is-globalization-explainer

Grinin, L. E., Ilyin, I. V., & Korotayev, A. V. (Eds.). (2012). Globalistics and globalization studies. Volgograd: Uchitel Publishing House. https://www.sociostudies.org/almanac/articles/state_sovereignty_in_the_age_of_globalization-_will_it_survive

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