Causes of changes in globalisation: changes in transport costs

International Trade and Globalisation

Topic: Globalisation and Trade Restrictions – Causes & Consequences of Changes in Globalisation

Definition of Globalisation

Globalisation is the increasing inter‑dependence of national economies through the integration of markets, ideas, cultures, investment, migration and information flows.

Objective

Explain how changes in transport costs – together with other key drivers – affect the level and pattern of globalisation, and describe the main types of trade restrictions.

How Transport Costs Influence Globalisation

• Lower transport costs reduce the total cost of moving goods, making export and import activities more profitable.
• They widen the range of products that can be traded profitably (e.g., fresh fruit, high‑value electronics).
• Cheaper transport encourages firms to locate production in countries with lower factor costs and to serve regional markets from overseas facilities.
• Reduced costs stimulate foreign direct investment (FDI) as multinational companies set up overseas plants, warehouses or distribution centres.

Major Drivers of Change in Transport Costs (and a specific consequence of each)

1. Technological advances in shipping
   • Containerisation, larger fuel‑efficient vessels, port automation → per‑unit transport cost falls → export‑supply curve shifts right, allowing new product categories (e.g., perishables) to enter world markets.
2. Air‑freight developments
   • More efficient aircraft and dedicated cargo hubs → lower air‑freight cost per tonne‑km → high‑value, time‑sensitive goods become more competitive internationally.
3. Infrastructure investment
   • Modern highways, high‑speed rail, inland waterways → reduced inland haulage cost → firms can locate factories further from final markets while keeping total logistics cost low.
   • Digital customs procedures (single‑window systems) → faster clearance reduces “time‑cost” of trade, encouraging higher trade volumes.
4. Energy prices
   • Oil price fluctuations affect shipping and aviation expenses → high oil prices temporarily raise transport costs, dampening trade; falling prices have the opposite effect.
   • Shift to alternative fuels (LNG, bio‑fuels, hydrogen) → potential long‑run reduction in cost volatility.
5. Deregulation and liberalisation
   • Removal of cabotage restrictions and open‑skies agreements → more competition among carriers lowers freight rates, expanding export opportunities.

Other Drivers of Changes in Globalisation (and a specific consequence of each)

• Communication and ICT advances – internet, e‑commerce platforms and digital payments → transaction costs fall, enabling small firms to trade internationally.
• Liberalisation of services – WTO GATS, open‑skies treaties → service exporters (banking, tourism, insurance) can access new markets, increasing service‑trade flows.
• Growth of multinational companies (MNCs) – creation of global supply chains → production is relocated to locations with comparative advantage, raising overall trade volume.
• Changes in trade‑policy – tariff cuts, removal of quotas, proliferation of FTAs → direct reduction of market‑entry costs, boosting imports and exports.

Types of Trade Restrictions (Methods of Protection)

Trade restrictions raise the price of imported goods or limit their quantity, protecting domestic producers.

Consequences of Changes in Globalisation

• Trade volume and pattern – lower transport, communication and policy costs increase the quantity of goods and services traded and allow new product categories (e.g., perishables) to enter world markets.
• Competition – domestic firms face stronger overseas competition, prompting efficiency gains or, in some cases, market exit.
• Environment – higher freight volumes raise carbon emissions; however, larger, more efficient vessels can reduce emissions per unit of cargo.
• Migration and remittances – easier movement of goods is often accompanied by greater labour mobility, generating remittance flows to home countries.
• Income distribution – winners (export‑oriented sectors, skilled workers) may see rising incomes, while losers (low‑skill workers in import‑competing industries) may experience wage pressure.
• Economic development – emerging economies can accelerate growth by integrating into global value chains, but they also become more vulnerable to external shocks.

Role of Multinational Companies (MNCs)

MNCs own or control production facilities in more than one country. By locating different stages of production where factor costs are lowest, they lower overall production costs, increase trade flows, and spread technology and managerial expertise across borders.

Quantifying the Impact of Transport‑Cost Changes

The simple relationship between transport cost (TC) and trade volume (TV) can be expressed as:

TV = f(1/TC)

All else equal, a fall in TC leads to a rise in TV.

Case Study: Containerisation

From 1970 to 2020 the cost of moving a twenty‑foot equivalent unit (TEU) fell by roughly 80 %, illustrating how technological progress can dramatically lower transport costs and boost global trade.

Implications for IGCSE Students

• Recognise transport costs as a variable cost that can shift a country’s comparative advantage.
• Explain how reductions in transport, communication and policy costs lead to higher imports, exports, FDI and the growth of MNCs.
• Use simple diagrams (e.g., export‑supply curve shifting rightward) to illustrate the effect of lower transport costs.
• Link changes in globalisation to wider consequences – competition, environment, migration, income distribution and development.
• Be able to name and describe the main types of trade restrictions and explain their impact on price and quantity.

Key Points to Remember

1. Transport costs include sea, air, rail, road and related logistics services.
2. Technological innovation, infrastructure upgrades, energy prices, deregulation, ICT advances, service liberalisation and the activities of MNCs are the main drivers of cost changes.
3. Lower transport and communication costs expand the range of tradable goods, increase trade volumes, stimulate FDI, and can alter the location of production.
4. These changes have wider consequences for competition, the environment, labour mobility, income distribution and the development trajectory of economies.
5. Students should be able to connect cost reductions to comparative advantage, trade patterns, and the broader impacts of globalisation, and also to identify the principal methods of protection (tariffs, quotas, subsidies, embargoes, technical standards).