4.1.3 Factors contributing to increased globalisation Flashcards
Globalisation
Globalisation is the trend
towards closer ties between
economies and businesses
within the global economy.
Isolationism
Isolationism refers to a nation whose trade policies are designed to put the interests of domestic businesses first by imposing trade barriers to hamper imports.
Trade liberalisation- Trade liberalisation involves removing trade barriers, such as:
Tariffs: This is a tax imposed on imports that raises the price of
imported products, aiding sales of domestic rivals.
Quotas: These are physical limits on the quantity of a type of good that
can be imported in a year. Once the limit is reached, consumers must
buy from domestic producers.
• Regulations: Rules, paperwork and systems can be put in place to
make it harder for imports to enter a country.
opportunities from trade liberalisation
Companies that rely on imported materials and components will enjoy lower costs, enabling them to reduce prices with cheaper imported rivals. Can lead to increased export opportunities with the removal of barriers.
What is trade liberalisation
Trade liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations. These barriers include tariffs, such as duties and surcharges, and nontariff barriers, such as licensing rules and quotas. Liberalisation will generally follow a new trade agreement between two
countries, on the basis that both remove trade barriers between one another.
Opportunities from trade liberalisation lower prices
Lower prices. The removal of tariff barriers can lead to lower prices for consumers. E.g. removing food tariffs in West would help reduce the global price of agricultural commodities. This would be particularly a benefit for countries who are importers of food.
Opportunities from trade liberalisation increased competitions
Trade liberalisation means firms will face greater competition from abroad. This should act as a spur to increase efficiency and cut costs, or it may act as an incentive for an economy to shift resources into new industries where they can maintain a competitive advantage. For example, trade liberalisation has been a factor in encouraging the UK to concentrate less on manufacturing and more on the service sector.
Opportunities from trade liberalisation economies of scale
Trade liberalisation enables greater specialisation. Economies concentrate on producing particular goods. This can enable big efficiency savings from economies of scale.
Opportunities from trade liberalisation inward investment
If a country liberalises its trade, it will make the country more attractive for inward investment. For example, former Soviet countries who liberalise trade will attract foreign multinationals who can produce and sell closer to these new emerging markets. Inward investment leads to capital inflows but also helps the economy through diffusion of more technology, management techniques and knowledge.
Threats caused by trade liberalisation
Allowing imports into a domestic market does
increase competition for domestic firms. The
most efficient should survive; those who could
only survive due to the barriers will lose that
protection and possibly face closure. Trade liberalisation can often be painful in the short run, as some industries and some workers suffer from the decline in uncompetitive firms. Though net economic welfare improves, it can be difficult to compensate those workers who lose out to international competition.
Environmental costs. Trade liberalisation could lead to greater exploitation of the environment,
some argue that trade liberalisation often benefits developed countries more than developing countries. Why
Infant-industry argument. Trade liberalisation may be damaging for developing economies who cannot compete against free trade. The infant industry argument suggests that trade protection is justified to help developing economies diversify and develop new industries. Most economies had a period of trade protectionism. It is unfair to insist that developing economies cannot use some tariff protectionism.
the success of trade liberalisation depends on
how flexible an economy is. If workers are highly educated and flexible, then it is easier for an economy to switch the nature of production. But, if there are labour market inflexibilities, then structural unemployment may persist for quite a while.
Having fewer barriers to trade reduces
the cost of goods sold in importing countries.
Critics of trade liberalisation claim that
the policy can cost jobs because cheaper goods will flood the nation’s domestic market. Critics also suggest that the goods can be of inferior quality and less safe than competing domestic products that may have undergone more rigorous safety and quality checks
The outcome of trade liberalization and the resulting integration among countries
Globalisation. it ultimately lowers consumer costs, increases efficiency, and fosters economic growth.
Why does trade liberalisation lead to lower prices
Trade liberalization promotes free trade, which allows countries to trade goods without regulatory barriers or their associated costs. This reduced regulation decreases costs for countries that trade with other nations and may, ultimately, result in lower consumer prices because imports are subject to lower fees and competition is likely to increase.
However, trade liberalization can negatively affect certain businesses within a nation because
of greater competition from foreign producers and may result in less local support for those industries. There may also be a financial and social risk if products or raw materials come from countries with lower environmental standards.
Countries with advanced education systems tend to adapt rapidly to a free-trade economy because
Countries with advanced education systems tend to adapt rapidly to a free-trade economy because they have a labor market that can adjust to changing demands and production facilities that can shift their focus to more in-demand goods. Countries with lower educational standards may struggle to adapt to a changing economic environment.
Political change
The key political change prompting the wave of globalisation shown
above is political change in China. Following the death of Chairman Mao,
the 1980s and 1990s saw a move away from hard-line communism. with
private ownership of business allowed. Then, in 2001, China joined the
WTO (World Trade Organization), giving it access to rich western markets
and offering the country the chance to enjoy an amazing export-led boom.
Britain’s decision to leave the EU, along with the election of Donald
Trump as US president during 2016, offer hints that political changes may
now slow down the march of globalisation.
Reduced cost of transport and communication. The extra costs involved in moving goods around the world can prevent
trade by lowering profit margins. However, the last 50 years have seen
significant reductions in the cost of transport for three main reasons:
1 Oil prices have remained stable or fallen, contrary to fears that the
supply of oil may run low, driving costs up.
2 Technological developments have led to the development of more
efficient engines, reducing fuel consumption and therefore cost.
3 Technology has also enabled the building of bigger trains, boats and
planes which allow container economies of scale.
Increased significance of transnational
corporations
Global giants, selling in hundreds of markets, seek growth by entering new
markets in order to boost sales year by year and keep shareholders happy.
Whenever a transnational corporation enters a new market, local businesses
face an incredibly powerful new competitor, one that will benefit from
enormous economies of scale. These, of course, are companies that will be
transferring resources and products from one country to another, boosting
international trade. In addition, when major global transnationals are able
to sell their product in so many markets, consumer choice from nation to nation declines: different national markets become less different.
Transnational corporations
TNCs are a key driver of globalisation because they have been re-locating manufacturing to countries with relatively lower unit labour costs in order to increase profits and returns for shareholders
Increased investment (factors leading to increased globalisation)
Communication and trade liberalisation have both driven increased trans-border capital flows. As financial markets are more willing to invest
capital in businesses based elsewhere in the world, so the world seems to
become a smaller place. The downside to this globalisation of financial
markets is the interconnectedness which has evolved. With banks in
one country investing elsewhere in the world, and lending to foreign
customers, a financial crisis in one part of the world can spread rapidly
throughout the whole global financial system, as seen in 2008.
Migration
Many people who migrate to other countries do so for economic reasons.
The vast majority of these migrants tend to share two key characteristics:
1 They are proactive and determined, willing to uproot and move to an
entirely new country to work and live.
2 They tend to be relatively well-educated.
These traits help to explain why increased migration can stimulate
economic growth.
Growth of the global labour force
Companies have managed to reduce their labour costs by seeing the market
for labour as global, rather than local or national. Many UK businesses have
offshored production in order to benefit from cheaper labour elsewhere in
the world. Meanwhile, other UK businesses facing shortages of skilled staff have recognised the benefits of recruiting from abroad in order to fill jobs that would otherwise have to be offshored, or left undone -
- losing sales.
Structural change
All economies that experience economic development see structural
change, with reduced reliance on agriculture as economic activity shifts
first to manufacturing, and then into services. Major economies that have
experienced rapid development in the past 40 years have increasingly
specialised in order to improve their international competitiveness. They
have been able to find export markets that have enabled the acceleration
of development and the related trade to sustain the rise of globalisation
Benefits and drawbacks of liberalisation again
Benefits of trade liberalisation include increased economies of scale and greater competition, which can drive down costs and improve quality. Drawbacks include the potential loss of local businesses due to increased competition, infant industries could be lost to foreign competitors, and the vulnerability of some industries dumping by overseas rivals. Dumping occurs when a country has excess stock and so it sells below cost on global markets, causing other producers to become unprofitable.
Reduced cost of transport and communication again
Large cargo ships have resulted in a decrease in the cost of transporting goods between countries. Oil has become cheaper, making global shipping of goods less expensive. Economies of scale mean the cost per item can reduce when operating on a larger scale. Transport improvements also mean that goods and people can travel more quickly. The internet and mobile technology have allowed greater communication between countries. People in one country can now order products online or on the telephone to be delievered to a different country, this had made globalisation so much easier.
Difference between transnational corporations and MNCs
A transnational corporation is a business that is registered and operates in more than one country at a time but selling the same products. This differs from a multinational corporation which still operates in different countries but tends to glocalise its products.
Many large organisations have taken advantage of lower trade barriers, labour mobility and cheaper transportation to grow rapidly and enter previously untapped markets.
FDI
Investment flows are the movement of money for the purposes of trade or production. Globalisation has facilitated such trading across countries, allowing businesses to more easily access funds to invest growth in new and emerging markets.
The greater freedom of movement of capital enables businesses to invest outside their country of origin. This may lower their own costs of production especially for MNC’s who typically increase investment flows by building factories and other facilities in other countries. They may also improve economic prospects and job opportunities in that country because of this. Cross-country mergers, takeovers and partnerships can also increase investment flows.
Migration again
As transport between countries has become cheaper, quicker and less regulated, globalization has encouraged workers to move around to find the best jobs and pay for their skill set. Economies such as the US are based on people looking for better opportunities. The relatively high level of migration into the UK became an important factor in the electorate’s decision to vote for ‘Brexit’ in June 2016.
Structural change again
Structural change is an economic condition that occurs when an industry changes the way it operates. As a country develops it moves away from primary sector business and employment (agricultural) to manufacture as it becomes industrialised. It can further develop into a knowledge economy - such as the UK - which specializes in tertiary businesses such as banking, IT, services and insurance. The countries that are able to pull themselves out of poverty are those that move away from the primary sector (agriculture). The economy grows as there is more productivity in the secondary sector - manufacturing increases and not income rise.
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