4.1b trade (globalisation) Flashcards
what is globalisation?
the economic integration of countries due to increasing movement of people, finance, technology and goods/services
what are the key features of globalisation:
-multicultural society
-goods and services traded throughout the world
-collaboration between countries
-economic interdependency
-the flow of capital between countries
what are the factors contributing to increased globalisation?
-trade liberalisation
-political change
-reduced cost of transport and communication
-increased significance of global (transnational) companies
-increased investment flows (FDI)
-migration
-growth of the global labour force
-structural change
what is trade liberalisation?
the removal or reduction of barriers to trade between different countries
benefits of trade liberalisation:
increased international trade allows businesses to increase their market size
↳ this leads to increased output and countries can benefit from economies of scale
helps businesses to reduce costs as imported raw materials and components can be sourced more cheaply
drawbacks of trade liberalisation:
-domestic firms, in particular, Infant industries may not be able to compete against international firms
-some industries may be subject to dumping as businesses abroad may sell excess products at unfairly low prices
what is political change?
changes in the government of a country can influence the country’s attitude to trade
what is reduced cost of transport and communication?
technological advancements due to the internet/mobile technology have improved made it easier for buyers and sellers to connect with one another
what is increased significance of transnational companies?
-a transnational company is a business that operates in more than one country
-they will have their headquarters in one country but have other branches in other countries
-with increasing numbers of transnational companies operating globally, there is an increased pressure by countries to engage in free trade
increased investment flows (FDI):
-FDI is important for job and wealth creation within an economy
-it allows businesses to establish themselves in countries where they may face trade barriers
migration (between and within economies):
-migration is the movement of people from one location to another
-migration has led to increased globalisation as better transportation and deregulation have allowed workers to have more flexibility when looking for work
-migration leads to cultures being imported and therefore the demand for new products but migrants often send a proportion of the money they
growth of the global labour force:
-the global labour force has grown significantly especially due to the growth of emerging economies
this has increased globalisation due to…
-more people in work means more income to spend on goods and services boosting global demand
structural change:
occurs when a country, industry or market changes which sector of industry they operate in
(eg: the UK has shifted from the manufacturing sector to the tertiary sector over the last 50 years)
what is protectionism?
when a government seeks to protect domestic industries from foreign competition
how will the government impose protectionist policies?
legislation, taxation and spending
benefits of free trade:
-provides growth opportunities for home nations as international markets become accessible and profitable
-nations can exploit the advantages other countries possess to produce certain goods and services more efficiently than others → goods and services become more accessible, they also become cheaper
-free trade may allow businesses to access components, raw materials and finished goods far cheaper than they could do otherwise
methods of protectionism:
-tariffs
-import quotas
other trade barriers:
-government legislation
-domestic subsidies
what is a tariff?
taxes on imports that increase the price of imported goods helps to shift demand for that product/service from foreign businesses to domestic businesses
benefits of tariffs:
-they protect infant industries so they can eventually become more competitive globally
-increases government tax revenue
-reduces dumping by foreign businesses (they cannot sell below the market price)
disadvantages of tariffs:
-increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers
-reduces competition for domestic firms
-reduces consumer choice as imports are now more expensive and some customers will be unable to afford them
EXAM TIP: tariffs
-it is not the foreign company, but the domestic company who pays the tariff
-in our cheese example above, any retailers in the USA who import cheese from britain have to pay the tariff when it crosses the border into the USA
-this policy may help cheese manufacturers in the USA but it harms any other business that imports and sells foreign cheese as it raises their costs of production
what is an import quota?
a government imposed limit on the amount of a particular product allowed into the country
what is the purpose of quotas?
restricting the physical amount of imports means that domestic businesses face less competition but benefit from a higher market share
benefits of import quotas:
-to meet extra the demand, domestic businesses may need to hire more workers which reduces unemployment and benefits the wider economy
-the higher prices for the product may encourage new businesses to start up in the industry
-countries are able to easily change import quotas as market conditions change
drawbacks of import quotas:
-quotas limit the supply of a product, whenever supply is limited, the price of the product rises
-they may generate tension in the relationship with trading partners
-domestic firms may become more inefficient over time as the use of quotas reduces the level of competition
how does government legislation work?
-governments can impose laws to restrict certain imports to protect customers and businesses
-imports may need to meet strict regulations in order to be allowed into the country
example of government legislation:
there is a UK ban on imported chicken from the USA due to the practice there of using chlorine to wash chicken carcasses
benefit & drawback of government legislation:
benefit:
-allows domestic firms to grow as they have limited competition from businesses abroad
drawback:
-can lead to retaliation from countries facing the legislation
how do domestic subsidies work?
payments are given to domestic businesses to help lower costs of production
examples of domestic subsidies:
-post brexit, the UK government is providing subsidies to its farmers in order to decrease their costs of production
benefits of domestic subsidies:
-reduced costs can lead to lower prices for domestic firms
businesses remain competitive and this helps to protect jobs in the industry
drawbacks of domestic subsidies:
businesses may become inefficient as they know their costs are being subsidise
examiner tips and tricks:
In Paper 1, you need to be able to evaluate the effects of protectionism on a business. You should also be able to assess the short term and long term effects of protectionism on foreign and domestic businesses. Depending on the nature of the business, the effect of protectionism can be immediately felt. It may take some time for other firms to feel the effects. Read the case study carefully to determine the context.
extra protectionism methods:
-soft loans
-state procurement
-technical barriers
what is a soft loan?
generous loan agreements offered to exporting businesses to help them compete in foreign markets
what is state procurement?
favouring domestic businesses as suppliers over foreign competition
what are technical barriers?
rules and regulations governing the standard of products entering the country
what are trading blocs?
a group of countries that form an agreement to allow free trade, collaboration and integration of economic, political and cultural policies
what two things do trading blocs do?
-increase trade liberalisation
-lead to trade creation
what is trade creation?
when businesses are able to enter new markets which can lead to an increase in sales volume and sales revenue
trade agreement from low to high levels of free trade:
low:
-protectionism
-preferential trade areas
-customs unions
-free trade areas
-common markets
-single markets
-economic unions
what are preferential trade areas?
certain products from certain countries receive reduced tariff rates
what are customs unions?
involve an agreed set of tariffs against
non-members but free trade exists between members
what are free trade areas?
where there is removal of all trade barriers between countries
what are common markets?
as well as free trade between members, there is also free movement of labour and capital
what are single markets?
as well as free trade, common laws are adopted to harmonise standards and tax
what are economic unions?
-economic unions aim for integration of economic, political and cultural factors
-this also includes the adoption of a common currency such as the euro
what are the main global trading blocs?
-NAFTA
-ASEAN
-EU
what is the EU?
-a single market with free movement of people, goods and services
-the EU adopts common laws around employment and consumer legislation
-most member states also use the euro
-countries within the union have no trade restrictions between themselves
-countries within the union have common external barriers (e.g. tariffs) to countries outside of the union
how many countries are in the EU?
28 countries
-countries in europe can apply to join the union
what does ASEAN stand for?
association of southeast asian nations
what is ASEAN?
-a free trade agreement/area
-the ASEAN free trade area is less integrated than the EU as it does not allow for the free movement of people between the countries
-aims to achieve free flow of goods in the region (eliminating trade barriers)
what is NAFTA?
-a free trade zone
-aim was to promote free trade between canada, the US and mexico
-the terms of the agreement were renegotiated and it was renamed
-member countries negotiate separate deals with outside members.
(many USA businesses relocated their manufacturing to mexico as goods could be produced there much more cost effectively due to the lower wages paid to mexican workers / the products could then be imported back into the USA without and tariffs being incurred)
benefits of trading blocs:
-opportunities to expand into new markets
-allows businesses to benefit from comparative advantage (cheaper and better quality products)
-easier to source labour
-aligns international legislation making markets more efficient
trading bloc benefits: free movement of labour
-trading blocs may also have free movement of labour, allowing businesses to source workers from a wider pool
-a higher supply of labour may push wages lower → reduced costs for business
drawbacks of trading blocs:
(for the businesses inside)
-countries and businesses outside the trading bloc may have a better comparative advantage which members are unable to access
-increased competition
-tensions with regions outside of the trading bloc
-common rules and regulations
-inefficiency
trading bloc drawbacks: increased competition
-there is increased competition for businesses within the trade bloc, which may be more of an issue for small businesses as they have fewer resources available with which to compete
trading bloc drawbacks: tensions with regions outside of the trading bloc
external tariffs set against countries outside of the trading bloc may lead to retaliation from these countries
trading bloc drawbacks: common rules and regulations
in order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to
