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 in goods and services
- Foreign direct investment (FDI) and cross‑border capital flows
- Migration of people and ideas
- Spread of technology and information
It creates larger markets, gives firms access to cheaper inputs and new customers, and intensifies competition.
2. Drivers of globalisation (Syllabus 6.2)
- Transport advances – containerisation, cheaper air freight, faster shipping.
- Communication advances – internet, mobile technology, real‑time data.
- Liberalisation of trade policies – reductions in tariffs, quotas and other barriers.
- Growth of multinational enterprises (MNEs) – firms that own or control production in several countries.
Example: Toyota operates plants in Japan, the United Kingdom, the United States and Thailand, allowing it to source components globally and sell worldwide.
- International financial markets – easier access to foreign capital and foreign exchange.
3. Specialisation and free trade (Syllabus 6.1)
3.1 Definitions
- Specialisation: concentrating on the production of goods and services in which a country has a comparative advantage (lowest opportunity cost).
- Free trade: unrestricted exchange of goods and services between countries – no tariffs, quotas, licences or other barriers.
3.2 Advantages of specialisation & free trade
- Higher overall output – resources are used where they are most productive.
- Lower prices for consumers – competition and cheaper imports reduce the cost of living.
- Greater variety of goods – consumers can buy products not produced domestically.
- Increased efficiency – firms must improve productivity to stay competitive.
3.3 Disadvantages of specialisation & free trade
- Loss of domestic jobs in industries that cannot compete with imports.
- Dependence on foreign suppliers – vulnerability to external shocks (e.g., oil crises, political instability).
- Potential decline of traditional skills and regional industries.
- Unequal distribution of gains – some groups (e.g., low‑skill workers) may lose while others benefit.
4. Types of trade restrictions (Syllabus 6.2)
| Restriction | Primary purpose | Typical effect on competition |
|---|
| Tariff (import duty) | Revenue‑raising or protection of domestic producers | Raises the price of imports, giving domestic firms a price advantage. |
| Quota (import limit) | Protect domestic industry by limiting import quantity | Restricts foreign competition; domestic firms can raise output and price. |
| Import licensing | Control volume and quality of imports (often for health, safety or security) | Creates a barrier to entry for foreign firms, reducing competition. |
| Subsidies to domestic producers | Encourage local production and improve export performance | Lowers domestic costs, allowing firms to undercut foreign rivals. |
| Technical standards & sanitary regulations | Protect health, safety and the environment | Can become non‑tariff barriers if standards are stricter than necessary. |
5. Effects of changes in globalisation on competition (Syllabus 6.3)
- Increased market size – Firms can sell to a larger customer base, achieving economies of scale and lower average costs.
- Greater competition from abroad – Domestic firms face new rivals, leading to price competition, product innovation and efficiency gains.
- Pressure on less‑competitive industries – Sectors that cannot compete on price or quality may shrink, relocate or exit the market.
- Shift in market power – Multinational enterprises (MNEs) may dominate whole sectors, reducing the market share of small domestic firms.
- Changes in factor markets – Higher demand for skilled labour, technology and capital can raise wages and stimulate investment in human capital.
- Risk of a “race to the bottom” – Firms may seek locations with weaker environmental or labour standards to cut costs, potentially lowering overall standards.
6. How trade restrictions modify these effects
- Introducing a tariff raises the price of imports, giving domestic producers a temporary competitive edge. Over time it can reduce incentives for domestic firms to innovate or improve productivity.
- Removing a quota opens the market to more foreign suppliers, intensifying price competition and forcing domestic firms to become more efficient or differentiate their products.
- Providing export subsidies helps domestic firms become competitive abroad, but may provoke retaliatory measures (e.g., counter‑voting at the WTO).
- Harmonising technical standards (through WTO agreements or regional accords) reduces non‑tariff barriers, allowing competition to be based on price and quality rather than regulatory differences.
- Imposing import licences can limit the number of foreign firms entering a market, protecting domestic incumbents but also reducing consumer choice.
7. Link to macro‑economics (balance of payments & exchange rates)
Trade restrictions affect the current account: a tariff raises the price of imports, reducing import volume and potentially improving the trade balance, while also influencing the demand for foreign exchange and the exchange rate.
8. Market failure and competition
Reduced competition from globalisation can exacerbate market failure in the form of monopoly power, where a single firm dominates a market and can set prices above marginal cost.
9. Supply‑side policy response
Governments may use supply‑side measures (e.g., investment in infrastructure, training programmes) to help firms adjust to increased competition and to mitigate adverse distributional effects.
10. Illustrative example – UK textile industry (1990s)
- Removal of import quotas on Asian garments dramatically increased the volume of cheap imports.
- Domestic firms that could not lower costs or add value lost market share and many closed.
- Firms that invested in design, branding and niche markets (e.g., luxury fabrics) survived and even expanded.
11. Diagram suggestions
- Tariff impact: Supply‑demand diagram for the domestic market showing the world price (Pw), the tariff‑inclusive price (Pw + t), the domestic supply curve (S) and the new equilibrium (higher price, lower quantity).
- Quota impact: Diagram with a vertical quota line limiting imports, showing the resulting domestic price rise and reduced import quantity.
- Effect of globalisation on competition: Two side‑by‑side supply‑demand graphs – one for a closed economy (higher price, lower quantity) and one for an open economy (lower price, higher quantity) to illustrate increased competition.
12. Summary of key points
- Globalisation expands markets and intensifies competition, encouraging efficiency, innovation and lower prices.
- Specialisation and free trade generate overall gains but can cause job losses and regional disparities.
- Trade restrictions are policy tools that can protect domestic firms in the short term but may hinder long‑term competitiveness.
- Removing restrictions usually increases competition, driving firms to improve productivity and product quality.
- Policymakers must balance the benefits of open markets with the need to support sectors and workers that are adversely affected.
- Monopoly power is a form of market failure that can be amplified by reduced competition; supply‑side policies can help mitigate negative effects.
13. Possible exam questions (Cambridge style)
- Explain how the removal of a tariff can affect competition in a domestic market.
- Discuss two advantages and two disadvantages of specialisation and free trade.
- 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.”
- Assess the likely effects on competition of a government subsidy to domestic exporters.
- Explain how a “race to the bottom” can arise from increased global competition.