Effects of changes in globalisation on the environment

IGCSE Economics 0455 – Globalisation, Trade Restrictions & the Environment

6.1 Specialisation & Free Trade

Specialisation (syllabus wording)

Specialisation – the process by which a country concentrates on producing the goods and services in which it has a comparative advantage. The syllabus refers to this as specialisation by country.

Advantages of Specialisation

• Higher total output – resources are used where they are most productive.
• Economies of scale – larger production reduces average costs.
• Greater variety of goods available for import.
• Potential for higher national income and standards of living.

Disadvantages of Specialisation

• Dependence on imports for goods not produced domestically.
• Vulnerability to world‑market fluctuations (price or demand shocks).
• Possible loss of domestic skills and industries.
• Potential environmental pressure from intensified production.

Free Trade (syllabus wording)

Free trade – the removal of all barriers (tariffs, quotas, licences, etc.) to the import and export of goods and services.

Advantages of Free Trade

• Lower consumer prices – cheaper imports increase real income.
• Greater choice and variety of goods.
• Stimulates economic growth through larger markets and economies of scale.
• Encourages the diffusion of technology and innovation.

Disadvantages of Free Trade

• Domestic industries may shrink or disappear, leading to job losses.
• Increased dependence on foreign suppliers for essential products.
• Risk of a “race to the bottom” in environmental and labour standards.
• Potential exploitation of natural resources in low‑cost producing countries.

6.2 Globalisation & Trade Restrictions

Definition of Globalisation (syllabus wording)

Globalisation is the increasing integration of world economies through the expansion of international trade, foreign direct investment (FDI), migration, the spread of technology and the inter‑dependence of markets.

Sixteen Specific Causes of Globalisation (syllabus list)

1. Advances in transport – container shipping, air freight, rail links.
2. Advances in communication – internet, satellite, mobile technology.
3. Reduction of tariff barriers – WTO agreements, multilateral trade negotiations.
4. Formation of regional trade blocs – EU, NAFTA, ASEAN.
5. Liberalisation of investment rules – fewer restrictions on foreign ownership.
6. Growth of multinational corporations (MNCs).
7. Development of global supply chains and outsourcing.
8. Increase in foreign direct investment (FDI).
9. Growth of global financial markets and easier capital flows.
10. Deregulation of capital movements.
11. Expansion of international tourism.
12. Migration of labour – movement of workers across borders.
13. Spread of technology and know‑how.
14. Consumer demand for a wider variety of products.
15. Growth of e‑commerce and digital platforms.
16. Privatisation and liberalisation of state‑owned enterprises.

Consequences of Globalisation (economic & environmental)

• Higher output and income for many countries.
• Increased competition for domestic firms.
• Spread of both clean and polluting technology.
• Higher volume of transport → higher carbon emissions.
• Shift of resource‑intensive production to countries with abundant natural resources.
• Potential “pollution‑haven” effects where firms locate in jurisdictions with weak environmental regulation.

Role of Multinational Corporations (MNCs)

Positive Contributions	Negative Implications
Capital inflows and job creation in host countries.	Profit repatriation reduces host‑country earnings.
Transfer of advanced (often cleaner) technology.	“Pollution‑haven” effect – relocation to countries with lax standards.
Development of global supply chains, improving efficiency.	Potential labour exploitation and weak health & safety standards.

Types of Trade Restrictions

• Tariffs (specific and ad‑valorem)
• Import quotas
• Export bans or licences
• Voluntary export restraints (VERs)
• Anti‑dumping duties
• Border Carbon Adjustments (BCAs)
• Import licences (general or selective)
• Quotas for natural resources (e.g., fish‑catch limits)

Seven Syllabus Reasons for Trade Restrictions (exact wording)

Reason	Brief Explanation
Infant‑industry protection	Shield new domestic industries until they become competitive.
Anti‑dumping	Prevent foreign firms selling below cost to drive out local producers.
Strategic (national security)	Restrict trade in goods essential for defence or critical infrastructure.
Tax‑revenue generation	Use tariffs to raise government income.
Demerit goods	Limit imports of products considered harmful (e.g., tobacco, asbestos).
Environmental sustainability	Protect natural resources, biodiversity or reduce pollution (e.g., bans on illegal timber).
Balance‑of‑payments stability	Reduce import expenditure to improve the current account.

Advantages & Disadvantages of Trade Restrictions

Advantage (Economic/Environmental)	Disadvantage (Economic/Environmental)
Protects domestic jobs and industries.	Higher consumer prices; possible retaliation from trading partners.
Can safeguard the environment (e.g., bans on hazardous imports).	May lead to inefficient domestic production and higher emissions if local technology is outdated.
Generates fiscal revenue through tariffs.	Distorts market signals, reducing overall welfare.
Supports strategic sectors (defence, energy security).	Limits consumer choice and can provoke WTO disputes.

6.3 Effects of Changes in Globalisation on the Environment

How Globalisation Influences the Environment

• Scale of production – larger markets encourage mass production → higher resource use and waste.
• Transportation – longer supply chains increase fuel consumption and CO₂ emissions.
• Technology transfer – both clean (renewables, efficient machinery) and dirty (out‑dated polluting tech) can spread.
• Resource allocation – comparative advantage may move extraction to resource‑rich, often less‑regulated countries.
• Regulatory differences – firms locate where environmental standards are weakest (“pollution‑haven” hypothesis).

Link to the Macro‑economic Aim of Environmental Sustainability

These environmental impacts directly affect the government’s macro‑economic aim of environmental sustainability – protecting the environment for future generations while maintaining economic growth.

Positive Environmental Impacts of Globalisation

1. Diffusion of green technology – trade in solar panels, wind turbines and energy‑efficient equipment.
2. Scale economies in clean production – larger output reduces average cost of environmentally‑friendly processes, making them affordable for developing economies.
3. International environmental agreements – trade networks provide forums for cooperation (e.g., Paris Agreement, Basel Convention on hazardous waste).
4. Greater awareness and consumer pressure – global media campaigns encourage firms to adopt greener practices.

Negative Environmental Impacts of Globalisation

1. Higher carbon emissions from transport – maritime shipping ≈ 3 % of global CO₂; air freight is even more carbon‑intensive.
2. Resource depletion – increased demand for minerals, timber and fish leads to over‑exploitation and loss of biodiversity.
3. Pollution havens – relocation of high‑polluting industries to countries with lax standards.
4. Waste transfer – export of e‑waste from developed to developing nations creates health and ecological hazards.
5. Increased waste generation – mass‑produced low‑cost goods often have short lifespans, contributing to landfill pressure.

6.4 Trade Restrictions as Environmental Policy Tools

Governments can use both **direct** and **indirect** trade‑related measures to internalise environmental costs and promote sustainability.

Direct Instruments

• Tariffs on high‑emission imports.
• Import quotas (e.g., on illegal timber, wildlife).
• Export bans or licences for scarce or endangered resources.
• Import licences for products that fail environmental standards.
• Quotas for natural resources (e.g., fisheries catch limits).
• Border Carbon Adjustments (BCAs) – charge for CO₂ emitted in production.

Indirect Instruments

• Environmental taxes (e.g., carbon tax, plastic‑bag levy).
• Subsidies for clean‑technology investment or renewable energy.
• Regulation and standards (e.g., emission limits, eco‑labelling).
• Privatisation of state‑owned utilities with performance‑based environmental targets.
• National‑minimum‑wage policies that can reduce low‑paid, high‑pollution jobs (indirectly encouraging automation and cleaner processes).
• Direct provision of public services such as public transport or waste‑management infrastructure.

Comparative Table: Policy Instruments, Goals & Effects

Policy Instrument	Primary Environmental Goal	Typical Economic Effect	Potential Drawbacks
Tariffs on high‑emission imports	Reduce carbon intensity of consumption	Higher domestic prices; incentive for domestic clean production	Risk of trade retaliation; regressive impact on low‑income households
Import quotas on illegal timber	Protect forests & biodiversity	Supply restriction → higher wood‑product prices	Requires strong monitoring; possible smuggling
Export bans on rare earths	Conserve strategic natural resources	Loss of export earnings; may stimulate domestic value‑adding	Encourages illegal extraction; harms export‑dependent sectors
Border Carbon Adjustments (BCAs)	Level playing field for domestic climate policies	Encourages foreign producers to adopt cleaner methods	Complex emissions accounting; WTO compatibility concerns
Environmental taxes (e.g., carbon tax)	Internalise the external cost of pollution	Higher production costs → possible price rise; revenue for green projects	May reduce competitiveness if not paired with rebates
Subsidies for renewable energy	Accelerate deployment of low‑carbon technologies	Stimulates investment; can reduce energy prices in the long run	Fiscal burden; risk of subsidising inefficient projects
Regulation & standards (e.g., emission limits)	Directly limit pollutants from production	Compliance costs for firms; may spur innovation	Enforcement costs; possible relocation of polluting firms
Privatisation with environmental performance clauses	Improve efficiency while meeting sustainability targets	Potential increase in service quality; private investment	Risk of profit‑over‑environment trade‑offs if monitoring weak
National‑minimum‑wage	Reduce low‑paid, high‑pollution jobs; encourage automation and cleaner tech	Higher labour costs; may raise product prices	Possible job losses in low‑skill sectors
Direct provision of public transport	Lower road traffic emissions	Government expenditure; can reduce congestion costs	High capital costs; need for efficient operation

6.5 Case Study – The “Pollution Haven” Debate (Textile Relocation)

During the 1990s many European textile firms moved production to South‑East Asia to exploit lower labour costs and weaker environmental regulations.

• Environmental impacts
  • Water pollution from dye effluents entered rivers, harming aquatic ecosystems.
  • Air pollution rose as factories relied on coal‑fired power plants.
  • Overall global CO₂ per unit fell because newer factories were more energy‑efficient – an illustration of the “scale‑efficiency” effect.
• Policy responses
  1. EU introduced Eco‑Design standards for imported textiles, requiring minimum energy‑ and water‑use criteria.
  2. Several Asian governments enacted stricter wastewater‑treatment licences for garment manufacturers.
  3. NGOs promoted voluntary certification schemes such as GOTS (Global Organic Textile Standard) to signal environmentally‑friendly production.

6.6 Modelling the Environmental Impact of Globalisation

Economists often illustrate the trade‑off between output (Y) and environmental degradation (E) with a simple power function:

• α > 0 – intensity of resource use (lower α = cleaner technology).
• β – elasticity of pollution with respect to output.
  • β < 1: pollution rises slower than output (possible “green growth”).
  • β = 1: pollution rises proportionally with output.
  • β > 1: pollution rises faster than output (environmental degradation).
• Globalisation can:
  • Reduce α through the diffusion of cleaner technology.
  • Increase Y via larger markets and scale economies.
  • The net effect on E depends on whether β is less than, equal to, or greater than 1.

6.7 Summary Points

• Specialisation by country and free trade raise efficiency but can cause job losses, dependence on imports and environmental pressure.
• Globalisation – defined by expanded trade, FDI, migration, technology spread and market inter‑dependence – brings both economic gains and environmental challenges.
• Sixteen syllabus causes of globalisation must be recognised; trade restrictions are justified for the seven exact syllabus reasons.
• MNCs act as agents of both technology diffusion and “pollution‑haven” effects.
• Environmental impacts of globalisation are mixed; they affect the macro‑economic aim of environmental sustainability.
• Governments can use a range of direct (tariffs, quotas, export bans, BCAs) and indirect (environmental taxes, subsidies, regulation, privatisation, national‑minimum‑wage, direct provision) trade‑related tools to mitigate negative impacts.
• Students should be able to:
  • Define specialisation, free trade, globalisation and the seven reasons for trade restrictions (exact wording).
  • Analyse case studies such as textile relocation and e‑waste flows.
  • Interpret the simple E = αY^β model and discuss how changes in α or β affect the environment.
  • Evaluate the effectiveness and possible side‑effects of policy tools like tariffs, quotas, BCAs, environmental taxes and subsidies.