Effects of changes in globalisation on international trade

International Trade and Globalisation – Effects of Changes in Globalisation on Trade

Learning objective

Explain how changes in the level of globalisation affect the volume and pattern of international trade, how governments respond with trade restrictions, and how these changes interact with foreign‑exchange rates and the current‑account balance.

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1. Specialisation & Free Trade (Syllabus 6.1)

• Specialisation: The process by which a country concentrates on producing the goods and services in which it has a comparative advantage (the lowest opportunity cost).
• Free trade: The removal of all barriers (tariffs, quotas, subsidies, NTBs) to the exchange of goods and services between countries.
• Advantages of free trade
  • Increases total world output – resources are allocated to their most efficient uses.
  • Gives consumers a larger variety of goods at lower prices.
  • Encourages competition, innovation and productivity growth.
• Disadvantages of free trade
  • Domestic industries that are not competitive may shrink or disappear, causing unemployment.
  • Countries become more dependent on imported inputs and on global supply‑chain disruptions.
  • Welfare gains may be unevenly distributed, leading to political pressure for protection.

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2. Globalisation (Syllabus 6.2)

Definition (Cambridge 0455): The increasing integration of world economies through lower transport and communication costs, the growth of global supply chains, and the expansion of trade, investment and information technology.

Key drivers of change

• Fall in transport costs – container shipping, air freight, and logistics improvements.
• Cheaper, faster communication – Internet, mobile technology, cloud computing.
• Expansion of global supply chains – production spread over several countries to exploit comparative advantage.
• Regional economic integration – EU, NAFTA/USMCA, ASEAN, Mercosur.
• Trade‑facilitation agreements – WTO, trade‑related aspects of investment treaties.

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3. Multinational Companies (MNCs)

• Definition (Cambridge): Enterprises that own or control production facilities in more than one country.
• How MNCs influence trade
  • Locate each stage of production where costs are lowest, creating complex intra‑regional supply chains.
  • Increase the volume of intra‑regional trade and the need for smooth customs procedures.
  • Lobby for lower barriers (tariffs, quotas, NTBs) to protect their cross‑border operations.
  • Can drive “re‑shoring” or “near‑shoring” when globalisation slows.

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4. Trade Restrictions (Syllabus 6.2)

Restriction	Primary reasons for use	Typical economic effect on imports / exports	Impact on welfare
Tariff (import duty)	Revenue generation; protect domestic producers; balance‑of‑payments protection	Domestic price rises by the amount of the tariff (Pw + t); quantity imported falls from Q₁ to Q₂.	Consumers lose surplus (higher price); producers gain surplus; government gains tariff revenue.
Quota (import or export limit)	Protect strategic sectors; limit foreign competition; political pressure	Quantity allowed is fixed; domestic price rises; scarcity creates rents for licence holders.	Consumers lose surplus; domestic producers gain; no direct government revenue unless licences are sold.
Subsidy (export or production)	Encourage domestic output; increase export earnings; support “infant” industries.	Reduces cost for producers → higher output and/or export volume; may lead to over‑production.	Producers gain; consumers may benefit from lower domestic prices; government incurs fiscal cost.
Non‑Tariff Barriers (NTBs)	Health, safety, environmental standards; anti‑dumping; strategic or political motives.	Restricts imports without a direct price increase – e.g., strict labelling, sanitary standards, technical specifications.	Consumers face limited choice or higher effective prices; producers protected; compliance costs affect both sides.
Embargoes & Sanctions	Political objectives – punish or isolate a country; security concerns.	Partial or total halt of trade with the targeted country; can cause supply shortages.	Domestic consumers lose access to certain goods; exporters lose markets; political leverage may be gained at economic cost.

Additional reasons for restrictions (expanded list)

• Political / strategic (national security, diplomatic pressure)
• Environmental protection (carbon taxes, wildlife‑trade bans)
• Health and safety (food‑safety standards, pharmaceuticals)
• Anti‑dumping measures (protect against unfairly low prices)
• Balance‑of‑payments concerns (to reduce import bills)

Market‑failure example

Governments may intervene when markets are not perfectly competitive. Monopoly is a classic market‑failure situation: a single firm can set price above marginal cost, reducing consumer surplus. Trade restrictions can be used to curb monopolistic power (e.g., imposing import quotas to allow domestic competition).

Key elasticity terms (AO1 requirement)

When discussing the effect of a tariff or quota, remember to label:

• Perfectly inelastic demand – vertical demand curve (quantity does not change with price).
• Unitary elastic demand – 45° line through the origin (percentage change in quantity equals percentage change in price).
• Perfectly elastic demand – horizontal demand curve (price is fixed, quantity adjusts infinitely).

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5. Why Restrictions May Be Introduced in a Globalising World

• Domestic industries lobby for protection against cheaper imports even when transport costs fall.
• Governments use NTBs to meet health, safety or environmental standards while appearing “open”.
• Revenue needs can keep tariffs in place despite lower trade costs.
• Political pressure, public opinion or strategic concerns can trigger temporary bans or sanctions.
• Balance‑of‑payments pressures may lead to import‑controlling measures.

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6. Effects of Changes in Globalisation on International Trade

6.1 When globalisation intensifies

• Higher trade volume – lower transport/communication costs reduce the price of imports and exports.
• Shift in trade patterns – countries specialise according to comparative advantage; new markets emerge.
• Pressure to liberalise – governments cut tariffs, quotas and NTBs to attract FDI and keep supply chains efficient.
• Greater competition – domestic firms must become more efficient, innovate or move up the value chain.
• Potential for trade disputes – rapid liberalisation can provoke accusations of unfair competition or dumping.
• Balance‑of‑payments impact – higher export earnings improve the current account; tariff revenue may rise but can provoke retaliation.

6.2 When globalisation slows or reverses

• Reduced trade volume – higher transport costs, protectionist sentiment or supply‑chain disruptions raise trade costs.
• Re‑industrialisation – governments encourage “bringing production home” through subsidies, tariffs or tax incentives.
• Higher consumer prices – tariffs and reduced competition increase the cost of imported goods.
• Trade diversion – importers seek alternative suppliers, shifting trade away from traditional partners.
• Balance‑of‑payments pressure – lower export earnings and higher import costs can worsen the current account.

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7. Diagrammatic illustration – Effect of a tariff

Students should be able to sketch the following diagram (hand‑drawn style is acceptable for the exam).

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8. Foreign‑Exchange Rates (Syllabus 6.3)

• Definition: The price of one currency expressed in terms of another (e.g., £1 = €1.15).
• Types of exchange‑rate regimes
  • Floating (flexible) rate – determined by market forces of supply and demand.
  • Fixed (pegged) rate – government or central bank maintains a set exchange rate, intervening in the market as needed.
• Factors that move the exchange rate
  • Interest‑rate differentials – higher domestic rates attract foreign capital, causing appreciation.
  • Speculation – expectations of future movements lead to buying or selling pressure.
  • Trade flows – a surplus (more exports) creates demand for the domestic currency, causing appreciation; a deficit has the opposite effect.
  • Political stability and confidence – perceived risk can lead to capital flight and depreciation.
• Consequences of exchange‑rate changes
  • Appreciation makes imports cheaper and exports more expensive → may reduce export volume and improve the trade balance.
  • Depreciation makes imports more expensive and exports cheaper → can boost export earnings but may raise inflation.
  • Exchange‑rate volatility adds uncertainty for MNCs and can affect investment decisions.

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9. Current‑Account of the Balance of Payments (Syllabus 6.4)

Components

• Trade in goods – exports minus imports of tangible products.
• Trade in services – tourism, transport, financial services, etc.
• Net primary income – earnings on investments abroad (interest, dividends) minus payments to foreign investors.
• Net secondary income (current transfers) – remittances, foreign aid, gifts.

Calculating the current‑account balance

Current‑account balance = (Exports – Imports) + Net services + Net primary income + Net secondary income

Implications of a surplus or deficit

• Surplus – net inflow of foreign currency; can lead to appreciation of the domestic currency, increase national savings, and provide a buffer against external shocks.
• Deficit – net outflow; must be financed by capital inflows (foreign investment, borrowing). Persistent deficits can increase external debt and pressure the exchange rate.

Policy tools affecting the current account

• Exchange‑rate policy (devaluation to boost exports, appreciation to curb deficits).
• Trade‑policy measures (tariffs, quotas, subsidies) to influence import and export volumes.
• Supply‑side policies – investment in infrastructure, education and technology to improve productivity and competitiveness.
• Fiscal policy – reducing government deficits can lower import demand.

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10. Case Study – Brexit (United Kingdom)

• Tariffs: The UK re‑introduced customs duties on certain agricultural and industrial goods from the EU, raising import prices and reducing quantities.
• Quotas: Import quotas on beef, pork and other food items were negotiated to protect domestic livestock producers.
• Non‑Tariff Barriers: New customs checks, rules‑of‑origin certification and divergent standards act as NTBs, slowing the flow of goods even where no tariff applies.
• Subsidies: Export‑support schemes for aerospace, pharmaceuticals and high‑tech sectors aim to maintain market share outside the EU.
• Embargoes/Sanctions: No formal embargoes, but political tension led to temporary bans on some EU‑origin pharmaceuticals during the early transition period.
• Impact on MNCs: Companies with EU‑wide supply chains (e.g., automotive manufacturers) faced higher logistics costs and considered relocating parts of production to avoid customs delays.
• Balance‑of‑Payments: Reduced import volume from the EU and lower export earnings initially worsened the current‑account balance; new trade deals with non‑EU countries aim to offset the loss.

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11. Key take‑aways

• Globalisation lowers the cost of trade, prompting many governments to liberalise, but domestic political and strategic pressures can still generate protectionist measures.
• Each type of trade restriction (tariff, quota, subsidy, NTB, embargo) has a distinct impact on import/export volumes, prices and the welfare of consumers, producers and the government.
• Multinational companies both drive and respond to changes in globalisation, shaping supply‑chain structures and influencing policy debates.
• Foreign‑exchange rates and the current‑account balance are closely linked to trade flows; changes in one area affect the others.
• Understanding the interaction between globalisation forces, trade restrictions, exchange‑rate movements and balance‑of‑payments outcomes is essential for analysing real‑world events such as Brexit.