Causes of changes in globalisation: changes in communication costs

International Trade and Globalisation – Globalisation and Trade Restrictions

Objective

Explain how changes in communication costs have caused changes in the level of globalisation.

1. What is Globalisation?

Globalisation is the increasing integration of national economies through the growth of international trade, investment, and the movement of people, ideas and technology.

2. Why Communication Costs Matter

Communication costs refer to the expenses incurred when transmitting information across distances – for example, telephone calls, internet data, and shipping of documents. Lower communication costs reduce the “friction of distance” and make it easier for firms and consumers to interact internationally.

3. Historical Trends in Communication Costs

4. Economic Theory: Transaction Costs

In the context of international trade, the total cost of a transaction can be expressed as:

\$TC = P + C{comm} + C{transport} + C_{info}\$

where:

• \$P\$ = price of the good or service,
• \$C_{comm}\$ = communication cost,
• \$C_{transport}\$ = transport cost,
• \$C_{info}\$ = cost of obtaining market information.

When \$C_{comm}\$ falls, the overall transaction cost \$TC\$ falls, making it more profitable for firms to engage in cross‑border trade.

5. How Lower Communication Costs Drive Globalisation

1. Improved Market Information – Firms can instantly access price data, consumer preferences and regulatory changes in foreign markets.
2. Coordination of Complex Supply Chains – Real‑time data sharing enables “just‑in‑time” production and reduces inventory holding costs.
3. Expansion of Services Trade – Services that rely on information exchange (e.g., consulting, software, finance) can be delivered remotely.
4. Growth of Multinational Enterprises (MNEs) – MNEs can manage subsidiaries across continents with lower overhead.
5. Facilitation of Outsourcing and Offshoring – Communication platforms allow tasks to be transferred to lower‑cost locations without loss of control.

6. Real‑World Examples

• e‑Bay and Amazon Marketplace – Sellers in China can list products for buyers in the UK with negligible communication cost.
• Software Development Outsourcing – Companies in the United States use platforms such as Upwork to hire programmers in India, coordinating via video calls and shared code repositories.
• Financial Services – Real‑time trading platforms allow investors to execute transactions on foreign exchanges instantly.

7. Implications for Trade Restrictions

Even when tariff barriers exist, low communication costs can mitigate their impact by:

• Enabling firms to find alternative markets quickly.
• Supporting the development of “digital trade” that bypasses physical borders.
• Providing data for lobbying governments to reduce unnecessary restrictions.

8. Summary – Key Points to Remember

• Communication costs have fallen dramatically due to advances in telecommunications and the internet.
• Lower \$C_{comm}\$ reduces overall transaction costs, encouraging more international trade.
• The reduction in communication costs has been a major driver of the recent surge in globalisation, especially in services and digital goods.
• Even with trade restrictions, cheap communication helps firms adapt and continue cross‑border activities.

9. Potential Exam Questions

1. Explain how a fall in communication costs can lead to an increase in the volume of international trade.
2. Using the transaction‑cost framework, discuss why firms might choose to outsource production to another country when communication costs decline.
3. Assess the extent to which lower communication costs can offset the effects of tariff barriers on a developing country’s exports.