Causes of changes in globalisation: changes in trade restrictions

International Trade and Globalisation – Trade Restrictions

1. What is Globalisation?

• Definition: The increasing integration of world economies through the movement of goods, services, capital, people, ideas and technology.
• Key drivers: lower transport & communication costs, growth of multinational companies (MNCs), and the removal of barriers to trade and investment.
• Why it matters: can raise living standards and spread technology, but also creates winners and losers.

2. Specialisation & Free Trade (Syllabus 6.1)

• Specialisation: Countries focus on producing the goods and services for which they have a comparative advantage.
• Free trade: The removal of all barriers to the exchange of goods and services between countries.

Advantages of free trade

• Gains from trade – higher total output and lower prices for consumers.
• Efficient allocation of resources – labour and capital move to their most productive uses.

Disadvantages of free trade

• Domestic industries that are less competitive may shrink or disappear, leading to job losses.
• Dependence on foreign suppliers can increase vulnerability to external shocks.

3. What are Trade Restrictions?

Government policies that limit the free flow of goods and services between countries. They are the main tools used to protect domestic interests and therefore have a direct impact on the pace of globalisation.

• Tariff barriers – taxes on imports or exports.
• Non‑tariff barriers (NTBs) – any measure other than a tariff that restricts trade, e.g. quotas, licences, technical standards, subsidies and bans.

4. Types of Trade Restrictions (Methods of Protection)

5. Reasons for Trade Restrictions (Syllabus 6.2.5)

Cambridge wording (in brackets) is shown for each reason.

• Protect infant (sunrise) industries – help new sectors develop.
• Protect declining (sunset) industries – preserve jobs in sectors losing competitiveness.
• Protect strategic industries – ensure national security (e.g., defence, energy).
• Avoid dumping – stop foreign firms selling below cost.
• Reduce current‑account deficit – limit imports to improve the balance of payments.
• Raise tax revenue – generate income for the government.
• Restrict demerit goods – limit imports of goods considered harmful (e.g., tobacco, drugs).
• Promote environmental sustainability – ban or tax goods that cause pollution.

6. Causes of Changes in Globalisation (Link to Trade Restrictions)

1. Political ideology

   • Shift from protectionism to free‑trade (neoliberal reforms) → lower tariffs/NTBs, deeper integration.
   • Nationalist or populist governments → re‑impose or raise barriers.

2. Economic objectives

   • Export‑led growth strategies → removal of export duties.
   • Infant‑industry policies → temporary tariffs or quotas.
   • Balance‑of‑payments concerns → import licences, quotas or higher tariffs.

3. International agreements

   • World Trade Organization (WTO) membership obliges members to lower tariffs and eliminate many NTBs.
   • Regional trade blocs (EU, USMCA, ASEAN, Mercosur) create common external tariffs and remove internal barriers.

4. Technological change

   • Cheaper transport and faster communication lower transaction costs, encouraging liberalisation.
   • Digital trade creates new regulatory issues (data localisation, e‑commerce taxes) that can add fresh NTBs.

5. Domestic economic conditions

   • Recession – governments may protect domestic producers with higher tariffs or quotas.
   • Economic boom – deregulation to meet rising import demand.

6. External shocks

   • Oil‑price spikes, pandemics, or geopolitical conflicts → temporary bans, export controls or strategic stock‑piling.
   • Supply‑chain disruptions → policies that encourage “reshoring” or diversification of sources.

7. Role of Multinational Companies (MNCs) in Globalisation (Syllabus 6.2.3)

• Make foreign direct investment (FDI), bringing capital into host economies.
• Transfer technology, managerial skills and production techniques.
• Create worldwide supply chains that link producers and consumers across borders.
• Expand market reach for both home‑country and host‑country goods.

Advantages for the host country – jobs, technology, tax revenue.

Disadvantages for the host country – profit repatriation, possible crowding‑out of local firms.

8. Impact of Changing Trade Restrictions on Globalisation

• Reduction of tariffs/NTBs → lower import prices, higher import volumes, greater consumer choice, tighter market integration.
• Increase of tariffs/NTBs → higher prices, reduced import volumes, possible retreat from global supply chains, slower globalisation.

Key consequences to consider

• Distributional effects – consumers may face higher prices; protected domestic producers gain; workers in export‑oriented sectors may lose if markets shrink.
• Balance‑of‑payments – import restrictions can improve the current account in the short term, but retaliation may hurt exports.
• Retaliation and trade wars – other countries may impose matching barriers, reducing overall welfare.
• Resource allocation – protection can lead to inefficiency (misallocation of labour and capital); liberalisation tends to move resources to more productive uses.

9. Illustrative Real‑World Examples

9.1 The 2008 Global Financial Crisis

• Many countries introduced temporary protectionist measures (e.g., export bans on wheat, higher tariffs on luxury goods) to safeguard food security and raise revenue.
• Result: a short‑term decline in world‑trade volumes, followed by a rapid reversal as economies recovered and WTO rules were re‑asserted.

9.2 US‑China Trade Tensions (2018‑2022)

• The US imposed additional tariffs on Chinese electronics; China responded with tariffs on US agricultural products.
• Effect: higher prices for consumers in both economies, disruption of supply chains, and a slowdown in the growth of global trade despite the long‑term trend toward liberalisation.

9.3 Brexit (2020‑2024)

• UK’s departure from the EU ended the free‑movement of goods within the single market, leading to new customs checks, rules of origin requirements and increased paperwork.
• Impact: higher transaction costs for UK‑EU trade, a modest reduction in trade volumes, and a shift for some firms towards alternative markets.

9.4 COVID‑19 Pandemic (2020‑2021)

• Countries imposed export controls on medical equipment and personal‑protective equipment (PPE); some introduced temporary import bans on non‑essential goods.
• Outcome: short‑term spikes in prices and supply‑chain bottlenecks, followed by a post‑pandemic push for more resilient, diversified supply chains.

10. Evaluating Changes in Trade Restrictions (Syllabus 6.2.6)

When judging whether a policy change will promote or hinder globalisation, use the following criteria:

1. Economic efficiency – does the change increase total welfare (e.g., reduce dead‑weight loss)?
2. Distributional impact – who are the winners and losers?
3. Political feasibility – is there public or elite support for the measure?
4. International obligations – does it comply with WTO or regional‑bloc rules?
5. Long‑run sustainability – will the measure encourage innovation, competitiveness and environmental goals?

11. Suggested Diagrams for Exams

• Flowchart – e.g., “Tariff reduction → lower import price → higher import quantity → greater market integration → higher level of globalisation.”
• Supply‑and‑demand diagram – show how an import tariff raises the domestic price, reduces quantity imported and creates a dead‑weight loss.
• Balance‑of‑payments diagram – illustrate how an import quota can improve the current‑account balance but may provoke retaliation that harms exports.
• Production‑possibility frontier (PPF) – compare a country’s specialization under free trade versus protectionist policies.

12. Summary Checklist for Exams

• Define globalisation and explain why it matters.
• Define specialisation and free trade; list two advantages and two disadvantages of free trade.
• Define tariffs and non‑tariff barriers; give at least three examples of each.
• List the eight syllabus‑specified reasons for imposing trade restrictions (use the exact wording).
• Explain, with a diagram, how a reduction in tariffs can increase globalisation.
• Discuss one advantage and one disadvantage of protectionist policies.
• Describe the role of multinational companies in promoting globalisation.
• Give a recent real‑world example of a change in trade policy and its impact on global trade.
• Apply the five evaluation criteria to judge whether a particular policy change would likely promote or hinder globalisation.