IGCSE Economics 0455 – Globalisation and Trade Restrictions
International Trade and Globalisation – Globalisation and Trade Restrictions
1. What is globalisation?
Globalisation is the increasing integration of world economies through the growth of international trade, investment, migration and the spread of technology. It creates larger markets and more opportunities for firms to sell and source inputs.
2. Main drivers of globalisation
Advances in transport (containerisation, cheaper air freight)
Advances in communication (internet, mobile technology)
Liberalisation of trade policies (reductions in tariffs and quotas)
Growth of multinational enterprises (MNEs)
International financial markets and capital flows
3. Types of trade restrictions
Restriction
Purpose
Typical Effect on Competition
Tariff (import duty)
Raise revenue or protect domestic producers
Increases price of imported goods, giving domestic firms a price advantage
Quota (import limit)
Restrict quantity of a specific import
Limits foreign competition; domestic firms can increase output and price
Import licensing
Control volume and quality of imports
Creates barriers to entry for foreign firms, reducing competition
Subsidies to domestic producers
Encourage local production
Lowers domestic costs, allowing firms to undercut foreign rivals
Technical standards & sanitary regulations
Protect health, safety, environment
Can act as non‑tariff barriers if standards are stricter than necessary
4. Effects of changes in globalisation on competition
Increased market size – Firms can sell to a larger customer base, encouraging economies of scale and lower average costs.
Greater competition from abroad – Domestic firms face new rivals, which can lead to price wars, product innovation and efficiency gains.
Pressure on less‑competitive industries – Sectors that cannot compete on price or quality may shrink or exit the market.
Shift in market power – Multinational enterprises may dominate sectors, reducing the market share of small domestic firms.
Changes in factor markets – Increased demand for skilled labour and technology can raise wages and encourage investment in human capital.
Potential for “race to the bottom” – In pursuit of lower costs, firms may seek locations with weaker environmental or labour standards.
5. How do trade restrictions modify these effects?
When a government imposes or relaxes trade restrictions, the competitive landscape changes:
Introducing a tariff raises the price of imports, giving domestic producers a temporary competitive edge. Over time, this can reduce incentives for domestic firms to innovate.
Removing a quota opens the market to more foreign suppliers, intensifying price competition and forcing domestic firms to improve efficiency.
Subsidising export‑oriented industries can help domestic firms become competitive internationally, but may provoke retaliatory measures from trading partners.
Harmonising technical standards (e.g., through WTO agreements) reduces non‑tariff barriers, allowing smoother competition based on price and quality rather than regulatory differences.
6. Illustrative example
Consider the UK textile industry in the 1990s. The removal of import quotas on Asian garments led to a sharp increase in competition. Domestic firms that could not lower costs or differentiate their products experienced falling market shares, while those that invested in design and branding captured niche markets.
Suggested diagram: Supply‑demand curves showing the effect of a tariff on the price of imported goods and the resulting market equilibrium for domestic producers.
7. Summary of key points
Globalisation expands markets and intensifies competition.
Trade restrictions (tariffs, quotas, licences, subsidies, standards) are tools governments use to influence competition.
Relaxing restrictions generally increases competition, driving efficiency and innovation, but can harm uncompetitive domestic sectors.
Introducing restrictions can protect domestic firms in the short term but may reduce long‑term competitiveness.
8. Possible exam questions
Explain how the removal of a tariff can affect competition in a domestic market.
Discuss two advantages and two disadvantages of using subsidies to support domestic exporters.
Using a diagram, illustrate the impact of an import quota on the price and quantity of a good in the domestic market.
Evaluate the statement: “Greater globalisation always leads to lower prices for consumers.”