IGCSE Economics Notes /  Globalisation and Trade Restrictions

6.2.1 Definition of Globalisation

• Globalisation refers to the increasing integration and interdependence of countries through trade, investment, technology, communication, and movement of labour and capital
• It leads to stronger economic links between countries

6.2.2 Causes and Consequences of Changes in Globalisation

Causes of Changes in Globalisation

• Changes in trade restrictions: Reduction in tariffs and quotas encourages international trade
• Trade agreements increase global economic integration leading to more cross-border trade
• Changes in transport costs: Improved transport technology reduces shipping costs
• Faster logistics systems increase international trade such as containerisation and improved aviation
• Changes in communication costs: Internet and digital technology reduce communication costs allowing firms to coordinate global production easily and expand global supply chains
• Movement of multinational companies (MNCs): Firms expand production across countries and foreign direct investment increases globalisation

Effects of Changes in Globalisation

• International trade: Increased exports and imports and greater specialisation between countries
• Competition: Firms face global competition leading to increased efficiency and innovation
• Environment: Positive effects include access to green technology, negative effects include increased pollution from production and transport
• Migration: Workers move to countries with better opportunities and labour markets become more global
• Income distribution: Skilled workers may gain higher wages but inequality may increase within countries
• Economic development: Developing countries may attract investment and increase employment opportunities

6.2.3 Role of Multinational Companies (MNCs)

• A multinational company is a firm operating in more than one country

Advantages to host countries

• Job creation
• Technology transfer
• Increased investment
• Improved infrastructure

Disadvantages to host countries

• Profits repatriated abroad
• Environmental damage
• Strong competition for local firms

Advantages to home countries

• Increased profits
• Access to cheaper production costs
• Global market expansion

Disadvantages to home countries

• Loss of domestic jobs
• Reduced tax revenue if production moves overseas

6.2.4 Types of Trade Restrictions / Methods of Protection

• Tariffs: Taxes on imports which raise the price of foreign goods
• Import quotas: Limits on quantity of imports allowed
• Subsidies: Financial support to domestic firms helping local producers compete
• Embargoes: Complete ban on trade with certain countries

6.2.5 Reasons for Trade Restrictions

• Protect infant (sunrise) industries
• Protect declining (sunset) industries
• Protect strategic industries
• Avoid dumping
• Reduce a deficit on the current account of the balance of payments
• Raise tax revenue
• Restrict the import of demerit goods
• Promote environmental sustainability

6.2.6 Consequences of Trade Restrictions

• Impact on the home country: Protect domestic employment, support local industries, improve balance of payments
• Impact on the home country disadvantages: Higher prices for consumers, less choice, reduced efficiency
• Impact on trading partners: Reduced export opportunities and possible retaliation or trade wars
• Advantages of restricting free trade: Protect jobs, support new industries, national security
• Disadvantages of restricting free trade: Reduced competition, higher prices, lower global efficiency