International Trade and Globalisation – 6.2
1. Definition of Globalisation (6.2.1)
Globalisation is the increasing integration of world economies through the movement of goods, services, capital, people and ideas. It can raise living standards by giving consumers more choice and firms larger markets, but it also creates distributional challenges that governments may try to manage.
2. Causes of Changes in the Level of Globalisation (6.2.2)
Four main drivers explain why the degree of globalisation rises or falls.
- Changes in trade restrictions – tariffs, quotas, subsidies and non‑tariff barriers (NTBs) that make imports cheaper or more expensive.
- Changes in transport costs – falling shipping, air‑freight and logistics costs make distant markets more accessible.
- Communication and information‑technology advances – the internet, e‑mail, cloud‑computing and mobile platforms reduce the cost of exchanging information and coordinating production across borders.
- Movement of multinational companies (MNCs) and foreign direct investment (FDI) – firms relocate production, set up subsidiaries or outsource services to take advantage of lower costs, new markets or strategic assets.
3. Consequences of Changes in Globalisation (6.2.2)
When any of the above drivers change, a range of economic and social effects can be observed.
| Area | Typical impact of increased globalisation |
|---|
| Trade volume | Exports and imports grow; markets become more inter‑dependent. |
| Competition | Domestic firms face more foreign rivals, encouraging efficiency and innovation. |
| Environment | Greater transport and production can raise carbon emissions, but technology transfer can also spread greener practices. |
| Migration and movement of people | Labour mobility rises; workers move to where skills are in demand, affecting remittances and cultural exchange. |
| Income distribution | Winners (often skilled workers, capital owners) may see income rise, while losers (low‑skill workers in import‑competing sectors) may face pressure. |
| Economic development | Developing countries can access larger markets and technology, potentially accelerating growth; however, benefits depend on domestic policies and institutions. |
4. Trade Restrictions – Forms and Purposes (6.2.3)
Governments may limit imports or promote exports for a variety of reasons. The most common instruments are shown below.
| Form of restriction | How it works |
|---|
| Import tariff | A tax on each unit of a good imported; raises the domestic price and reduces quantity demanded. |
| Import quota | A legal limit on the quantity of a good that can be imported in a given period. |
| Subsidy | Direct financial assistance to domestic producers (cash grants, tax relief, low‑interest loans) that lowers their cost of production. |
| Non‑tariff barrier (NTB) | Regulations, standards, licences or administrative procedures that make imports more costly or difficult. |
5. Protecting Infant (Sunrise) Industries
5.1 Definition
An infant (or sunrise) industry is a newly‑emerging domestic sector that cannot yet compete with established foreign producers because it lacks experience, scale, technology or capital.
5.2 Economic Rationale – Why Governments Intervene
- Market failure – economies of scale: New firms have high average costs; temporary protection gives them time to expand output and achieve lower unit costs.
- Learning‑curve effects: Experience reduces costs; protection allows firms to move down the learning curve.
- Positive externalities (spill‑overs): Skills, R&D, and technological know‑how generated by the industry benefit other sectors of the economy.
- Strategic importance: Certain sectors (e.g., aerospace, renewable energy, defence) are vital for national security or future diversification.
5.3 Common Protective Measures
- Import tariffs (e.g., 15 % on foreign solar panels).
- Import quotas (e.g., a maximum of 10 000 imported smartphones per year).
- Production subsidies (e.g., $0.08 per watt for domestically produced solar cells).
- Preferential government procurement (mandating a share of public‑sector purchases from domestic firms).
- Technical standards that favour locally‑produced goods (a form of NTB).
5.4 Advantages and Disadvantages
| Advantages | Disadvantages |
|---|
- Allows firms to achieve economies of scale and lower average costs.
- Encourages domestic innovation, technology acquisition and skill development.
- Reduces reliance on foreign suppliers in strategic sectors.
- Can create jobs and stimulate related industries (e.g., component suppliers).
| - Higher prices for consumers because competition is limited.
- Risk that the industry becomes a permanent “protected” sector (rent‑seeking).
- Fiscal cost of subsidies and loss of tariff revenue for the government.
- Potential retaliation from trading partners, leading to trade disputes.
- Misallocation of resources if the industry never becomes competitive.
|
5.5 Conditions for Successful Protection (Cambridge Evaluation Criteria)
- Clear time‑frame – protection should be temporary (e.g., 5–10 years) and linked to measurable milestones.
- Performance criteria – firms must demonstrate cost reductions, productivity gains or export readiness before protection is withdrawn.
- Transparency and accountability – policies are publicly announced, monitored and reviewed regularly.
- Complementary policies – investment in education, infrastructure, R&D and access to finance to support industry growth.
- Net welfare gain – the benefits to the protected sector must outweigh the dead‑weight loss to consumers and the rest of the economy.
5.6 Illustrative Example – Domestic Solar‑Panel Industry
- Government imposes a 20 % tariff on imported panels.
- Provides a subsidy of $0.10 per watt to domestic manufacturers.
- Funds a national research centre for photovoltaic technology (complementary policy).
- After five years, domestic firms have cut production costs by $0.05 per watt, reached economies of scale, and begin exporting to neighbouring countries.
Suggested diagram: A supply‑and‑demand diagram for the domestic market showing the world price (PW) rising to the domestic price (PD) after a tariff. Highlight the increase in domestic supply, the fall in imports, the loss of consumer surplus, the gain in producer surplus and the government revenue (or, for a quota, the rent captured by licence holders).
6. Summary of Key Points (Exam‑style Quick‑Recall)
- Globalisation = increasing integration of world economies; its level changes because of trade restrictions, transport costs, communication/IT advances and the movement of MNCs/FDI.
- Consequences include higher trade volumes, intensified competition, environmental pressures, migration flows, shifts in income distribution and varied impacts on economic development.
- Trade restrictions = tariffs, quotas, subsidies and NTBs.
- Infant‑industry argument = temporary protection to let new sectors achieve scale, learn, generate spill‑overs and become strategically independent.
- Advantages: scale, innovation, jobs, strategic security.
Disadvantages: higher consumer prices, risk of permanent protection, fiscal cost, possible retaliation, resource misallocation. - Success requires a clear time‑limit, measurable performance targets, transparency, supportive policies and an overall net welfare gain.
7. Potential Examination Questions
- “Explain why a government might protect an infant industry and discuss two advantages and two disadvantages of this policy.”
- “Evaluate the likely impact of a 15 % tariff on imported solar panels on consumers, domestic producers and government revenue.”
- “Using a diagram, illustrate how a quota differs from a tariff in protecting an infant industry.”
- “Analyse the wider consequences of increased globalisation on trade, competition, the environment and income distribution.”