0455 · 6.2Globalisation and trade restrictions

Globalisation and its drivers

0:00A phone can be designed in one country, assembled in another and sold across the world. Its production connects workers, businesses and consumers across national borders. These connections can bring cheaper products and new jobs, but also create pressures on local industries. Those pressures explain why governments sometimes restrict trade. Globalisation is the increasing integration of the world's economies through trade, investment, the movement of people and communication. Integration means national economies become more closely connected and dependent on each other.

0:29A factory closure abroad might interrupt supplies at home. Equally, a new overseas market can give a local producer opportunities to expand. Imports are goods and services bought from abroad, while exports are goods and services sold to other countries. Free trade is international trade without restrictions such as tariffs or quotas. Consumers gain access to foreign products, and producers can reach overseas customers. However, businesses also face competitors from beyond their own national borders.

0:56Think of international connections as routes along which products, money, information and people can move. When using these routes becomes cheaper or easier, globalisation usually increases. Higher costs or additional barriers can slow that process. So government decisions, technology and the location choices of businesses all change the pace of globalisation. Changes in transport costs affect whether international trade is worthwhile. Containerisation uses standard containers that can move between ships, trains and lorries.

1:25This reduces handling time and the cost of transferring goods. Lower delivery costs allow firms to sell profitably in more distant markets, so international trade becomes more attractive. Falling communication costs also strengthen international connections. The internet allows businesses to contact suppliers, advertise overseas and coordinate factories across countries at relatively low cost. A designer can send instructions abroad almost immediately. Service providers can also reach foreign customers online, so globalisation extends beyond the movement of physical goods.

Trade barriers and multinationals

1:57Trade restrictions are government measures that limit international exchange or protect domestic producers from foreign competition. Removing these barriers makes foreign products easier or cheaper to buy. Adding restrictions can reduce cross-border purchases and encourage production at home. Rising protectionism, which is government action to shield domestic industries, can therefore slow globalisation. A multinational company is a firm with headquarters in one country and production or operations in several countries.

2:24Its movement into new locations spreads international business connections. For example, a car maker may establish a factory abroad and purchase components from several countries. Decisions about where these firms operate can increase globalisation or reduce particular countries' connections. These causes can reinforce each other. Cheap communication makes managing an overseas factory easier, while inexpensive transport helps deliver its products. Reduced trade restrictions then make selling those products across borders more attractive.

2:52Conversely, rising delivery costs and new barriers may encourage firms to shorten supply chains or move production closer to customers.

Effects of globalisation

3:00Greater globalisation usually increases international trade because businesses can reach more customers and obtain supplies from more countries. A clothing producer might import fabric, manufacture shirts and export the finished products. If restrictions increase, some of these transactions become less profitable. Trade may decline, or businesses may switch towards different trading partners. Competition is rivalry between firms seeking customers. Globalisation often intensifies this rivalry because domestic businesses face more foreign suppliers.

3:29Customers can compare prices and quality across a wider range of products. Firms then have stronger incentives to reduce costs, improve products and provide better service to retain their customers. Some businesses struggle with this pressure. A local manufacturer with high costs may lose sales to cheaper imports and reduce employment. If several suppliers disappear, consumers may eventually have fewer alternatives. The consequences therefore depend partly on whether local firms can adapt and whether genuine competition continues after the initial changes.

3:58Globalisation affects the environment through production and transport. More shipping, flights and road deliveries can increase emissions, while expanding factories may increase pollution or resource extraction. However, international connections also spread cleaner technology. A country can import efficient machinery or equipment for renewable energy, which can reduce environmental damage. Environmental sustainability means meeting present needs without compromising future generations' ability to meet theirs. The environmental outcome depends on production methods, transport distances and enforcement of environmental rules.

4:31A short journey from a heavily polluting factory may cause more damage than a longer journey from a cleaner producer. Distance alone cannot establish the overall effect. Migration is the movement of people from one place to another to settle or work. Greater international connections can make overseas employment opportunities easier to discover. Workers may move towards countries where wages or job prospects are better. Receiving countries gain workers, while countries of origin may lose people with valuable skills.

4:59Workers abroad can send money to families in their country of origin. These transfers help households pay for food, education or healthcare. Receiving countries may fill shortages in occupations such as nursing or construction. However, rapid population increases can place pressure on housing and public services when their provision expands too slowly. Income distribution describes how income is shared among the households of a country. Globalisation can increase earnings for workers whose skills attract international demand.

5:27Owners of successful exporting firms may also benefit. Meanwhile, workers in industries facing cheaper imports may experience lower earnings or unemployment, so income gaps can widen within a country. Economic development is an improvement in people's living standards and welfare. International investment can create jobs, provide training and introduce better production methods. Higher household incomes can improve access to education and healthcare. Nevertheless, development gains are smaller when working conditions are poor, environmental damage is severe or benefits reach only a narrow group.

Multinationals: home and host countries

5:59A multinational company's home country is where its headquarters are, while a host country is one where it sets up operations. A host country can gain jobs when a foreign firm opens a factory. Local workers receive wages, and nearby suppliers may gain orders. Training can also improve employees' skills and help them qualify for better-paid work. New machinery and production techniques may also arrive with the multinational. Local businesses can learn from supplying the multinational or employing workers trained by it.

6:27The host government also gains revenue if the company's profits are taxed there. This can help finance public services, although generous tax concessions reduce the revenue available. There are disadvantages for host countries too. A large foreign business may take customers from smaller local producers and cause closures. Profits, which are total revenue minus total cost, may be sent to the home country. Consequently, part of the income generated by production leaves the host economy.

6:53Environmental damage and poor working conditions are further risks where regulation is weak. A host country may also become dependent on one large employer. If that firm relocates, workers and suppliers can suddenly lose income. Strong standards and a wider range of employers help reduce these risks. The home country can receive profits from overseas operations. Its headquarters may employ managers, researchers and designers, while domestic suppliers gain export orders for equipment or components.

7:20Access to overseas markets can support expansion. These benefits can increase employment and income in activities that remain at home. However, moving production abroad can remove jobs from the home country. Domestic suppliers may also lose orders when the multinational switches to overseas sources. Funds spent on overseas factories cannot also build factories at home, so domestic investment may fall. The overall effect depends on whether overseas expansion supports existing activities or replaces them.

Trade restrictions and their purposes

7:49A tariff is a tax on imports. It raises the cost of bringing a product into the country. If importers pass this cost to customers, the selling price rises and demand for the imported product contracts. Some customers may switch to domestic alternatives, which gives local producers protection from foreign competition. Another method of protection, the import quota, is a limit on the quantity of a product that can be imported.

8:11Once that limit is reached, no more of the product may enter the country during that period. Reduced availability can raise prices and encourage customers to choose domestic products. Unlike a tariff, a quota does not by itself raise tax revenue for the government. Governments can also protect domestic producers without taxing or limiting imports at all. They pay a subsidy, which is a payment by the government to producers that lowers their costs and encourages production.

8:35Lower costs let domestic producers offer lower prices and compete with imported alternatives. Consumers may benefit from cheaper products, but the payments use public funds that could support other services. The strongest measure is an embargo, which is a ban on trade with a country or in a specific product. A government may stop all trade with one country, or ban imports of a product that damages the environment. A tariff leaves imports possible at a higher price.

9:00An embargo stops the trade completely, so domestic producers face no competition from the banned imports. For example, an imported appliance costs eighty dollars, and a similar domestic appliance sells for ninety-four dollars. The government adds a twenty-five per cent tariff, and the full tax reaches buyers. The tariff per unit equals the import price multiplied by the tariff rate. Eighty dollars multiplied by twenty-five divided by one hundred gives twenty dollars.

9:25Adding twenty dollars to eighty dollars produces a selling price of one hundred dollars. Before the tariff, the imported appliance was cheaper than the domestic one. Afterwards, the domestic appliance has the lower price. Customers who regard the two as similar may switch to the domestic product. Those who keep buying the import pay twenty dollars more for it. Suppose six hundred appliances are still imported after the tariff. Government tariff revenue equals the tariff per unit multiplied by the quantity imported afterwards.

9:53Twenty dollars multiplied by six hundred appliances gives twelve thousand dollars. Tax is paid only on the goods that actually enter the country. One reason for trade restrictions is to protect infant, or sunrise, industries. These are new industries that have yet to become established. Early production costs may be high because workers need training and businesses are still developing efficient methods. Temporary protection can give them time to improve before facing full international competition.

10:19The benefit requires a realistic route towards competitiveness. A new producer might learn better techniques and spread its initial expenses across more sales. However, permanent protection can reduce the incentive to improve. Consumers then continue paying higher prices to support an industry that remains inefficient. Governments may also protect declining, or sunset, industries. These are established industries experiencing a long-term reduction in demand or competitiveness. Protection can slow job losses and give workers time to retrain.

10:48The cost is that continued support may keep resources in activities with weak prospects and delay their move into expanding industries. Strategic industries are activities considered essential to national security or the functioning of the economy. Food production, energy and defence equipment can provide examples. Governments may protect domestic capacity to reduce dependence on foreign supplies during emergencies. Maintaining this capacity can have a cost, especially when overseas producers offer lower prices.

11:16Dumping is selling a product abroad below its cost of production. Such imports can undercut domestic producers and threaten their survival. A tariff on these imports raises their price, so restrictions help a country avoid the harm that dumping causes. Check the cost of production first, because an efficient foreign firm can sell cheaply and still cover its costs. Another reason is to reduce a deficit on the current account of the balance of payments.

11:39This account records trade in goods and services, primary income and secondary income between residents and the rest of the world. A deficit means payments on this account exceed receipts. Restrictions may reduce import spending and therefore help narrow that deficit. This result requires import expenditure to fall. Customers may continue buying essential imports despite higher prices, so spending might remain high. Trading partners could also respond with restrictions that reduce the country's exports.

12:05You will see the detailed accounts in the video on the current account of the balance of payments. Tariffs are also used to raise tax revenue. Governments collect money on imports that continue entering the country. A tariff that greatly reduces purchases shrinks the quantity being taxed, so a very high rate can raise little. An embargo prevents the covered imports altogether, so it cannot generate tariff revenue from those prohibited transactions.

12:29Governments also use trade restrictions to limit the import of demerit goods. Demerit goods are products that are more harmful to consumers than they realise, so they tend to be overconsumed. A tariff on imported tobacco raises its price, so consumption contracts. A quota or an embargo cuts the amount that reaches consumers. Finally, restrictions can promote environmental sustainability. A tariff on goods made with highly polluting methods makes them dearer, so cleaner producers gain sales.

12:55An embargo on timber from illegally cleared forests helps protect those forests for future generations. The gain is real only when domestic producers meet the same standards. Otherwise the pollution simply moves to local factories.

Evaluating trade restrictions

13:07For the country imposing restrictions, advantages can include protected employment, greater security of essential supplies and opportunities for new industries. Tariffs also raise revenue for the government, and limits on demerit goods reduce harmful consumption. These gains are largest when consumers switch to domestic products and trading partners do not retaliate. The disadvantages include higher prices and less consumer choice. Domestic firms face weaker competitive pressure, so some may operate inefficiently or improve products more slowly.

13:37Imported materials can also become more expensive for local producers. Those higher costs may damage businesses that use foreign components, including firms selling abroad. Trading partners can lose export sales and employment when access to a market becomes restricted. They may retaliate by imposing barriers of their own. The original country then faces reduced overseas demand for its exports. A wider cycle of restrictions can reduce trade and damage producers on both sides.

14:03Examiners often see the four methods of protection mixed up, so tie each one to its defining feature. A tariff is a tax on imports, and an import quota is a limit on their quantity. A subsidy is a payment to domestic producers, while an embargo is a ban on trade. Dumping means selling abroad below the cost of production, so check the cost before using the term. Always say whether a multinational's home or host country is meant, and weigh consumer costs alongside producer benefits.

14:30In multiple-choice questions, look for the defining feature of each measure before considering its consequences. In structured questions, define asks for a precise meaning, state for clear terms, and explain for reasons why or how. To analyse, examine the relationships in detail by linking the policy, the response and the resulting effect. Consider this examination task: discuss whether a government should impose a tariff on imported clothing. Discuss requires an issue to be examined in depth through a structured answer covering both sides.

15:00Start with a reason supporting the measure and develop its consequences. Then examine a disadvantage before making a justified judgement. A tariff raises the cost of imported clothing. If customers switch to domestic alternatives, local producers gain sales and may employ more workers. Temporary protection could help a new industry improve its production methods. The government also receives revenue from clothing that continues to be imported. However, consumers face higher prices and may have fewer affordable choices.

15:28Weaker competition can reduce domestic producers' incentives to improve efficiency. Trading partners may retaliate against the country's exports and threaten employment elsewhere. These costs can outweigh the jobs protected in clothing production. On balance, a government should usually impose a tariff on imported clothing only to protect a promising infant industry for a limited time. The tariff should end once the industry's costs fall and its productivity improves. A permanent tariff is usually the worse choice, because consumers keep paying higher prices for an industry that stays inefficient.

15:58Globalisation is the increasing integration of the world's economies through trade, investment, the movement of people and communication. Transport costs, communication technology, restrictions and multinational location decisions change the strength of those connections. The effects reach competition, migration, income distribution, development and the environment. Benefits and costs can fall on different groups within the same country. Trade restrictions alter those connections. A tariff is a tax on imports, and an import quota is a limit on the quantity of a product that can be imported.

16:30A subsidy is a payment by the government to producers that lowers their costs. Embargoes go furthest, since an embargo is a ban on trade with a country or in a specific product. When judging any restriction, follow its effects on prices, production and jobs, then on consumers and trading partners.